Breaking Up the Big Four

There is a convenient syllogism to which all of us are prone – you may recognise it yourself. It goes “Something must be done. This is something, therefore we must do this.” It is perhaps in this light that we are currently hearing more calls to “break up the Big Four”.

It's easy to see how we've got here. Everyone agrees there is a problem with market concentration in audit. It's not the elephant in the room, so much as the gorilla in the doorway. Everyone is happy to grumble about the problem, but no one wants to acknowledge that solving it will be very difficult and means we all have to work together – not just in the UK, but in all the markets where these firms operate.

Until now, there has been consensus that the complex, but sustainable, answer to market choice is not to break but to build. But when even the Financial Reporting Council breaks that consensus, we need to look at why. Few bodies are so well-placed to understand the issues around audit concentration. Moves to break up the Big Four were not in the FRC’s 2018/21 strategy or budget, which suggests this is an idea they have embraced recently, or had previously discarded.

Since everyone is agreed that there is nowhere near enough competition nor choice, and that the market structure must change, the question is surely not, “why do the Big Four have so many Public Interest Entity audits?” but, “what is putting other large firms off from entering this market?” The FRC might themselves be able to shed some light on this – two large firms outside the Big Four have chosen to exit the PIE audit market recently, citing the exponential rise in the cost of FRC regulation, the fact that it now takes several months to review audits, and the disincentive for audit partners to risk their careers as a result of protracted investigations. The question of unlimited liability can also be added into this mix.

It is removing such barriers to entry that the FRC would be better focussed on addressing. If firms other than the Big Four are being dissuaded from taking on PIE audits, then the answer surely cannot be to create more of them. Such new firms would doubtless also take a good hard look at the risk profile of a large audit and conclude – as their mid-sized competitors already have – that the rewards aren't worth it.

The other justifications put forward for breaking up the market, such as the conflict with consultancy work, are already dealt with under the FRC’s own ethical standards for auditors – the success of which can be shown by the fact that in no cases of alleged audit failure has conflict been claimed as a reason.

We could not agree more that there must be a solution. But it must be one that works – not just in the UK but worldwide. It must protect the quality of audit, safeguard trust in audit, and help audit deliver and underpin trust in business. Audit is evolving, and must keep evolving, in order to meet the needs of society. So much good work has been done over the last ten years. Let us not throw it all away just because “something must be done.”