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Opening up the Audit Market: What Will the CC’s Measures Mean for Smaller Firms?

The Competition Commission is moving to promote a more competitive audit market - what does it mean for the future of your practice?

Opening up the audit market: what will the CC’s measures mean for smaller firms?

Last year, Laura Carstensen of the Competition Commission went to war with the Big Four accountancy firms, with the EU Competition Commissioner watching interestedly in the wings. The result, in the new rules announced in October 2013 is that companies will be required to tender their audit contracts every 10 years rather than the five initially suggested by the Commission.

 

Opening up the audit market: what will the CC’s measures mean for smaller firms?

Too close

The issue of concern was that companies and their auditors had too cosy a relationship, with some leading companies having had the same auditors for several decades. This cemented the position of the Big Four while at the same time acting as a powerful disincentive to rock the boat. The Big Four fought a predictable rearguard action against the proposals and the new rules must be seen as a partial retreat by the Commission, although the ten year retendering exercise is compulsory whereas there were exemptions available from the requirement to retender every five years. The new rules also represent a toughening of the rules from the ‘comply or explain’ approach introduced by the Financial Reporting Council in 2012.

 

Opening up the audit market: what will the CC’s measures mean for smaller firms?

Musical chairs

It is difficult to see much to cheer about for small to medium sized firms in developments since last October. As the Financial Times reported in February 2014, there has indeed been a flurry of activity in the audit market with a number of companies changing their auditor. One of the largest was Vodafone, who ended their relationship with Deloittes after 26 years to engage PwC. The first FTSE 350 company to change its auditor after the announcement that the Competition Commission was looking to bring in new rules to open up the market was Land Securities who appointed EY having previously been audited by PwC. Many in the profession feel that what has emerged is a merry go round between the Big Four whose position of dominance remains as entrenched as ever.

 

Opening up the audit market: what will the CC’s measures mean for smaller firms?

There’s hope yet

However, some of the second tier firms like Grant Thornton are still optimistic about making inroads into the market, and are looking at targeting those large companies that are less geographically diverse. Part of the problem is that rules designed to break the hold of the Big Four fail to take into account that many large modern businesses are so complex that only the Big Four have the capacity to carry out the audits. Grant Thornton has in fact gained FTSE 350 group Interserve as an audit client this year under the new regime, a victory which was welcomed by many.

 

Opening up the audit market: what will the CC’s measures mean for smaller firms?

You’re up, Europe

Nonetheless, Brussels has not said its last word on the matter and it is likely that, at some stage, the EU will move from a requirement to tender every ten years to a requirement to change auditor every ten years. Perhaps here there will be an opportunity for firms outside the charmed circle to break in, as has already happened in the public sector. With the Audit Commission winding up its in-house practice and embarking on a retendering of audit in the local government market where KPMG and PwC were previously dominant, second tier firms have been able to secure significant amounts of work, with PwC now reduced to being a minor player in the local government market.

Maybe there is a lesson here for the private sector: that smaller firms can build the capacity needed to audit large organisations (Grant Thornton audit Birmingham City Council with an annual turnover of £3 billion) and that, at least in the audit market, size doesn’t always matter.  

With the audit market opening up, your firm needs to be fully equipped with sophisticated, streamlined technology that will allow you to compete.

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Dr James Huntington Managing Director

James is the Founder and Managing Director at IT Farm. His background in Computer Science help lay the foundation for IT Farm to become one of the UK's first Cloud Computing Companies.

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