The
large listed audit market is dominated by the Big Four accounting firms; this
has led to concerns about the lack of competition and choice in the audit
market. With only four possible firms, because of reputation and expertise, to
choose from there might be a lack of competition. The high degree of
concentration in the audit market became obvious when the Price Waterhouse and
Coopers & Lybrand merged in 1998 (Big six to Big five) and the demise of
Arthur Andersen in 2002, following its involvement in the Enron Scandal (Big
Five to Big Four).
There is
a genuine concern about the impact of concentration in the audit market and, in
particular, the potential impact of a major firm failure on capital markets.
The problem would for sure become very serious significantly if the Big 4 audit
firms were to become a Big 3.
The Big
Four audit firms audit all but one of the FTSE 100 companies. In the perception
of most large listed companies, the Big Four are better placed to offer two key
components of the audit product: value-added services on top of the audit
itself, and insurance against catastrophes and reputational risk. The Big Four
are also perceived to have greater capacity and international coverage to
deliver the third key component: the technical audit itself (Oxera, 2006, p.1).
Reputation is an important driver of choice, favoring the Big Four, whether
this is based on real or perceived differences.
For
mid-tier firms there are various entry barriers. They lack the expertise,
manpower and funding to compete with the Big Four firms. Big Four firms have
- a credible reputation with large companies, their investors and other stakeholders.
- appropriate resources and expertise in place to carry out large company audits, including relevant sector-specific skills.
- an effective capability to secure timely and reliable audit opinions on overseas subsidiaries for audits of companies with significant international operations.
Additional Thoughts
Large
accounting networks are necessary to perform quality audits of the financial
statements of multinational companies. Most stakeholders agree that additional
choice in the audit market would be beneficial but should this be left to
market forces or should regulatory measures be adopted? Taking away or limiting
a company’s ability to choose its best provider would not enhance objectivity,
skepticism, or the public interest. Reforms should be made to encourage more
natural competition in the audit market such as reforms that govern firms’
access to capital, reform of regulation around auditor liability, reforms to
apply ban on restrictive big four clauses in audit proposals. Measures that are
designed to artificially limit the scope and outreach of existing large global
networks are inappropriate and will likely to limit a company’s choice of
auditor, reduce competition and restrict continuous quality improvement.
