Will the Big Four audit row ever cease?

The Big Four must be wondering whether the debate over their dominance of top audits will ever go away.
BDO Stoy Hayward, the UK’s sixth largest firm and a challenger to the incumbents, released research last week linking audit concentration to an increase in fees.

It also suggested that a fall of 10% in the Big Four’s market share could lead to a drop of 7% in audit fees.
BDO’s managing partner thinks the research proves ‘distortion’ in the market.

‘We’ve been saying this for some time, but people always asked us to prove it,’ he says.
Has BDO proved it? The Big Four certainly don’t think so.

Since the Andersen demise, when the concentration began, there has been a huge amount of regulatory change, driving up audit costs.

Trying to determine what the impact of concentration is, outside of those changes, is impossible, the big firms say.

‘Getting that level of information is like extracting the egg from a cake after it’s baked,’ according to Jan Babiak of Ernst & Young.

What’s more, they dispute the argument that there has been concentration.

‘Before the Andersen demise, we had five firms. The largest three had a bigger concentration than the Big Four have today,’ Deloitte assurance partner Martyn Jones said.

And even if the report were accurate, says Peter Wyman of PricewaterhouseCoopers, it has only resulted in a 2.5% increase in fees, over five years.

The Financial Reporting Council, the body which would be tasked with intervening in
the market, seems unbothered.

Paul Boyle, its chief executive, pointed out that audits do not cost companies a great deal anyway: quality, not cost, is the issue.

But the research may have a deeper sting than that.

If the London School of Economics, which produced the research for BDO, has proved ‘distortion’ it might well mandate a stronger line from regulators.

Newman says banning ‘Big Four-only’ clauses ­ forced on companies by lenders ­ is a case in point.
‘One of the arguments I have heard for not banning such clauses is that they are an outcome of a free market and it would be inappropriate to restrict the free operation of the market.

‘I believe that the LSE research has dispelled this assumption,’ he said.
You can see that argument being used again. If this isn’t a free market, then there needs to be few scruple
about taking a strong line on a whole string of issues.

The report is to be viewed by the European Union, and other competition authorities may well also wish to
have a look.

Whatever happens, the Big Four may wish they didn’t have to deal with this all the time.

Wyman says: ‘[The debate] probably won’t [go away]. It’s worth reminding people that there was a debate about this 30 years ago.

‘I hope it goes away if it hasn’t already in the minds of serious policy makers.’