The dominance of the Big 4 audit firms continues to be a cause for concern according to a report by the UK’s reporting and governance watchdog, the Financial Reporting Council. The FRC has published the third of its Progress Reports outlining the progress of the 15 recommendations made by the Market Participants Group (MPG) in October 2007 which were designed to increase choice in the audit market.
FTSE100 companies are particularly wedded to their Big 4 relationships with PwC maintaining an almost unmoved market share of 40% in the UK’s blue chips. Of the next 4 firms, only BDO Stoy Hayward has managed to secure a FTSE100 mandate since November 2006. The bias against the non-Big 4 by the big plcs is especially noticeable looking across the 250, Small Cap/Fledgling and AIM where mandates are more evenly spread. One of the difficulties faced by the review is that they have found it difficult to obtain precise figures on the number of audits put out to tender. Surprisingly, ‘firms do not always keep complete records of tenders which they are involved with and are sometimes reluctant to disclose information which may be seen as commercially sensitive’.
While the FRC has noted some progress including publication of some Codes of Practice and drafts of revised Ethical standards, it is the concentrated market share issues which stand out. Commenting on the report’s publication outgoing CEO, Paul Boyle, said: “Despite the progress that has been made, the FRC continues to have significant concerns about the risks posed by audit market concentration and believes that these risks are likely to continue for the medium to long term.”
In UK law the audit properly belongs to shareholders, which is not the same as the US where the audit has a different legal standing and is seen as a management tool. Despite this, and the fact that UK shareholders routinely vote on the appointment of the auditors and their remuneration, it is unheard of for shareholders to propose an alternative firm, although there’s little to stop them. Recommendations 8 and 10 of the MPG both address the role of shareholders in audit selection but in comparison with higher profile remuneration issues, audit governance remains a dry, highly academic topic which struggles to get into the limelight, until it goes wrong that is.
Although the Treasury Select Committee let the auditors off lightly for their role in the banking crisis, when the dust has settled on this proxy season, expect to see some brave souls pushing the audit reform agenda.