Audit firms feel the heat

Eight months into the Competition Commission investigation into the audit market in the UK, it is too early to gauge the outcome of the probe, says Sara White

Already there have been in-depth submissions from Big Four to mid-tier firms, from academics to institutional investors and the scope is wide-ranging.

There is criticism of the lack of competition, fears about the impact of mandatory auditor rotation and references to the high cost of switching audit firms, and underlying everything is the perceived threat to audit quality.

For many, the nature of banking covenants means that companies feel obliged to use a Big Four firm, while others feel that the mid-tier may not have the resources and expertise to handle major FTSE audits.

This stagnation in audit will never change when mid-tier firms feel stymied at every turn; the impetus to invest in highly-skilled audit teams is a costly venture if the business opportunities are limited.

As a result there is little choice for companies.

The squeeze on fees also raises questions about quality. While companies drive down fees, they still demand the highest audit quality.

Many feel that more competition will drive margins down further, hardly the answer to higher quality standards.

For many, the fee margins don’t reflect the risks. While the Big Four may be able to absorb the risk; smaller firms may be put in an untenable position.

So the depth of audit expertise is limited to the big power brokers of the profession.

As fees shrink, there is even more likelihood that audit will remain in the clutches of a small number of powerful entities, which can offset the reduced income by offering clients a raft of additional services.

Without a new regulatory framework, it is unlikely the current status quo will change. Faced with the powerful lobby of the Big Four, the outcome may well be a watered-down set of guidelines on audit, rather than practical and effective reform of the current system.

The UK investigation is not the only one, of course. In Brussels, the big guns are working on draconian proposals for audit reform.

The European Commission has outlined radical proposals to break up the firms, splitting the audit and tax disciplines, and forcing mandatory rotation.

To break up the firms is not realistic; Europe is not an island and firms are part of global networks, one of the attractions for their client base.

When it comes to European issues, there is always the troubling question about how influential the UK really is; after all, on key issues, the UK position is frequently outside the mainstream.

Not the best position for the UK to shape European reform.

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