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Finance chiefs warn on audit market share cap

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Capping the number of blue-chip companies that the ‘big four’ ‎accountancy firms can audit risks reducing, rather than enhancing, competition in the sector, Britain’s biggest businesses have warned.

Sky News has obtained a submission to the Competition and Markets Authority (CMA) by the 100 Group, whose membership includes the finance chiefs of almost every FTSE-100 company.

In it, the group calls for audit committee chairs at big companies to be subject to regulatory approval before they are appointed.

The CMA has been instructed by Greg Clark, the business secretary, to probe the UK audit sector with a view to proposing radical reforms in the wake of criticism of accountants’ roles in the collapse of Carillion and BHS.

In the document, the 100 Group’s chairman, Brian Gilvary, argues that a cap on the big four firms’ market share “may be detrimental and may not increase competition or quality, and could possibly reduce competition”.

Mr Gilvary, whose full-time job is as BP’s chief financial officer, insisted that the right to appoint auditors should not be removed from individual company boards, amid suggestions that responsibility for doing so could be handed to an independent body.‎ ‎

“We strongly believe that the right to appoint, evaluate, and determine the tenure of auditors should be retained by shareholders, as represented by the audit committee,” he said in the 100 Group’s submission which said an “expectation gap” was at the root of concerns over the functioning of the market.‎ ‎

This week’s deadline for responses to the CMA inquiry comes amid a raging battle over the future of the audit profession and the structure of the quartet of firms which dominate it: Deloitte, EY, KPMG and PricewaterhouseCoopers.

Prominent corporate failures and subsequent probes by regulators including the Financial Reporting Council (FRC) have resulted in a litany of fines totalling tens of millions of pounds.

KPMG, EY, PWC, Deloitte
Image:
KPMG, EY, PWC, Deloitte dominate the audit profession

On Friday, the FRC‎ confirmed a report by Sky News last weekend that Stephen Haddrill, its chief executive, would step down next year after a decade in the job.

In its response to the CMA, the 100 Group said it wanted auditors outside the ‘big four’ to compete for mandates at “the larger end of the market if they have the ability and appetite to do so”.

However, it noted its disappointment that big blue-chip companies “have not had as much success in engaging non-Big Four firms in the audit tender process”.

Grant Thornton, which sits just outside the leading quartet, said this year that it would cease trying to win audit work from FTSE-350 businesses.‎

“Our members note that, whilst they do often invite non-Big Four firms to participate in the audit tender process, they often choose to not take part or are excluded early in the process due to a lack of capability,” Mr Gilvary wrote.

The BP finance chief also warned that the UK audit market would be rendered unviable if one of the big four was to quit the sector.

“The exiting of a Big Four firm from the audit market would cause greater concerns to quality, efficiency, and cost of an audit, all of which are unfavourable to shareholders and companies,” he added.

Among the options being weighed by both the FRC and CMA is a ban on the provision of non-audit services such as consulting by the auditors of the same FTSE-350 companies.

Senior figures in the accountancy profession are resigned to such a measure being imposed.

However, the 100 Group said in its submission dated October 26 that it did not support a blanket ban.

It cited activities classified as non-audit services that auditors are required to provide, such as reviewing half-yearly financial statements and supporting bond issuances, which would be affected by such a wide-ranging clampdown.

“If audit firms were prohibited from providing non-audit services to their audit clients…in our opinion, the quality of the audit would no doubt suffer,” it said.

The finance chiefs also warned against a formal split of the big four firms into separate audit and non-audit entities, arguing that it would reduce the level of technical expertise and increase audit costs.

“Any cost increase would ultimately be passed onto shareholders without any associated benefits such as improved audit quality or a greater level of assurance,” they warned.‎

Another mooted idea, to impose joint audit arrangements on companies, with one of the roles being held by a smaller firm, is also rejected by the 100 Group on the basis that a similar exercise in France has not “enabled the smaller firm to take on the larger audits themselves”.

The CMA inquiry is not the only investigation affecting Britain’s bean-counters.

Mr Clark‎ has asked Sir John Kingman, the former Treasury mandarin who now chairs Legal & General, to conduct a review of the FRC’s remit and role.

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