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.”
I think that there is a perception in the eyes of some of the public that auditors get paid a lot whilst at the same time they offer no protection to creditors, shareholders, employees or other stakeholders. In many ways the auditing profession could be seen as being part of the greedy capitalist model who can walk away from a disaster unscathed.
Perceptions are important, even though the facts could be entirely different. Those of us in the accounting profession know that auditors cannot foresee future catastrophes, although a review of critical management systems and processes could indicate the level of risk that some boards are prepared to live with.
I would also recognise that some professionals involved with audits of companies that subsequently fail would themselves have a sense of failure because they did not see the problem coming.
Strangely I was in The Royal Liverpool Hospital last October for a week, and the view from my ward was across the Carillion building site. Even then the new hospital was one year late because of "complications". The failure of Carillion has set back the opening of the new hospital even further. One of the few beneficiaries of the collapse of Carillion has been PwC, a member of the Big 4, who have taken on the role of liquidators and pocketed over £20m as a consequence.
The slow erosion of trust in institutions, such as the audit profession, needs to be taken seriously. Every time that a high profile company collapses it underscores the fragility of the market system that we have been living in since 1980's. If we cannot find ways of demonstrating that we also believe that there is a systemic problem to be fixed, then I sense that one will be forced upon us in the coming decade. We shall only have ourselves to blame when that happens.
I am afraid this misunderstands some of the issues. For public interest audits it is not permitted to carry out consultancy for the audit client. Additionally there will be very few auditors left who also do consultancy and I suspect none in large firms where large audits are performed. Audit is a specialism these days and the more complex audits require more focused specialists. That’s not to say that we don’t need to address the issues of audit failure and also of what an audit does or doesn’t do in terms of giving assurance on a company. There is much to consider and part of the issue is also connected to the financial reporting standards applied and the innate complexities of modern businesses.
Someone with just an accountancy A level might well have concluded the going concern principle should have been challenged when auditing the year end 2016 accounts for Carillion . If one word describes what the auditing profession needs more of , it is " integrity " .
For almost 50 years I have been proud to be a member of the Institute. Sadly I no longer feel the pride that I once did in holding the ICAEW qualification. The Institute and the Big Four are rightly taken to task on National Television, on radio and in the press. Those at the head of the ICAEW do not appear to recognise what is happening in the real World inhabited by the majority of the membership. Their concern appears to be the survival of the Big Four and the so called Metropolitan Elite. Until recently the thought of resigning my membership of The Institute had never passed through my mind. Now, it is not a matter of will I ever resign but more of when will I resign. Colin Hughes
Low audit fees are the biggest barrier to greater plurality. Audit is a low margin business in it's own right but is seen as the "bread and butter" which cements the reputation of the firm and relationships with clients and supports scale. It is only due to the scale of the big 4 and their other service streams that PIE audit makes sense for them. I do agree that audit needs to be broken away from other services. Separate legal entities could be set up and structured under the existing brand in such a way that partners are incentivised to make audit pay in it's own right. That would push up fees and lower the biggest barrier to other competitors.