'Institutional prejudice' restricting audit market

(Accountancy Age) The Big Four accountancy firms dominate the FTSE audit market thanks to “institutional prejudice”, a House of Lords inquiry into the audit profession has heard.

BDO managing partner Simon Michaels made the remark when trying to explain the perception of FTSE audit committees who award audits to Big Four firms, arguing that there were mid-tier firms who would have the appropriate knowledge, reach, service quality and expertise to perform the audit but lost out as “size and revenue is seen as quality”.

“It’s frustrating that revenue is seen as reputation,” he said. “We are not seen as big enough for some companies – it’s ridiculous. Making a buying decision outside of the Big Four is seen as a risky bet.

“The market is so concentrated that I feel that if one of the Big Four exits the market, there will be a risk of systemic failure in the market being able to provide services required. The audit market needs intervention.”

However Russell McBurnie, finance director of AIM-listed accountancy firm RSM Tenon, ventured that RSM Tenon (and perhaps, similar firms) did not see the Big Four firms as their competitors, but other mid-tier firms instead, therefore having no interest in most FTSE audits.

A merger between mid-tier firms – to create a larger firm that would challenge the Big Four – was ruled out by Michaels and McBurnie, with the latter adding that “mid-tiers still have to get over the perceptions of finance directors, investors, brokers, audit committees, and banks – some of whom demand Big Four audits in their bank covenants.”

Increasing investment was ruled out as a possibility, with the firms suggesting that unless there was real competition in the market – and an erosion of “institutional prejudice” against non-Big Four firms – investing in the business with the sole, specific aim of winning Big Four clients would be inadvisable.

One solution was proposed by David Herbinet, head of corporate and public interest market teams for Mazars: joint auditing, which is compulsory in France (Mazars are joint auditors for BNP Paribas, Europe’s third-largest bank).

“A joint audit is essentially two or more firms expressing an opinion together on the financial statements of a group,” Herbinet explained. “The audit is not performed twice: the auditors work together. They look at the most complex and challenging issues together – it focuses on judgement rather than compliance.”

(For more on this topic look out for the December issue of Financial Director)