The Big Four audit firms must get smaller
Top of the in-tray for Lady Hogg, the new chairman of the Financial Reporting Council (FRC), should be how to increase auditor choice. Four big accounting firms is not enough, even if another one does not disappear.
The Big Four audit 99 per cent of FTSE 100 companies, 94 per cent of the next 250 largest businesses and even 80 per cent of the FTSE Small Cap index. BDO and Robson Rhodes, pick up most of the rest of the business but they are so far outside the Big Four that even merging would not bring them into the big league.
Mergers have reduced a broad spread of UK accounting firms to a global quartet, with Price Waterhouse’s union with Coopers & Lybrand combing two big players into a giant. The collapse of Arthur Andersen after the Enron scandal then removed one of the top competitors to leave the unhealthy four. These firms hold not only a UK monopoly but a global grip on the market.
Such a small choice is a serious worry and Lady Hogg must address how to widen it. Companies could choose a smaller firm, of course, but the perception persists that big firms must have a big audit firm, and as small and medium size companies aspire to appear big, they use the big companies’ big auditors. Bankers, suppliers, investors and credit-rating agencies encourage this concentration among the Big Four.
But it means that any company that moves its audit from one of the four to another has almost no choice if it needs an independent accounting firm – or a firm independent of its rivals.
FRC could seek a break up one or all of the Big Four but that is impractical, not least if it simply creates new firms that clients consider too small to use.
Instead, Lady Hogg should consider banning companies from using their auditor for non-audit work. That would force clients to make a choice – and they might decide to keep their existing accounting firm for consultancy work and put the audit with another firm that might be outside the Big Four.
But by changing ownership and financing rules, it may be possible to create a new audit company – possibly with partners who breakaway from the big firms – backed by private-equity or institutional investment. If one new firm could take away just 15 per cent of the work from each of the Big Four, it would create a new substantial force in auditing.
