BDO LLP response to House of Lords report on auditors market concentration

Report of the House of Lords Select Committee on Economic Affairs –

Auditors: Market concentration and their role

James Roberts, Senior Audit Partner, BDO LLP comments:

“BDO has been arguing the case for significant change in the oligopolistic audit market for many years and we’re delighted that the House of Lords Select Committee has reached the same conclusion that significant change is desired, required and inevitable.   

“We will work alongside the competition authorities to encourage the creation of a better audit market that serves the needs of all those that have a stake in the success of our largest companies.”

In-depth comment and analysis from BDO:

BDO welcomes the report. We believe it is balanced, practical and timely, and that it identifies the important issues surrounding the over-concentration of the audit market, and the dangers that brings to the UK economy, particularly those which the loss of another major firm might bring.

The proposed referral to the Office of Fair Trading, and potentially to the Competition Commission, of a broad range of issues is a proportionate response to an unhealthy market, and one which has no clear ‘silver bullet’ solution.

Despite this their Lordships identify a number of proposed changes which we believe will be helpful in reducing the market power of what they describe as a ‘self reinforcing’ oligopoly. In particular we welcome:

• A proposed end to the use of restrictive covenants requiring ‘big four’ auditors;
• Regular retendering of the very largest companies’ audits;
• Disclosure of more detail around auditor appointments and the thinking behind them;
• Increased dialogue with shareholders about such appointments (although doing so every five years does seem a touch infrequent to us); and,
• Government considering a wider range of firms for work they themselves commission;

We also welcome their desire to use the Audit Commission as a catalyst for growth in competition outside the four largest firms.

The committee raised a number of issues not directly related to competition. We would make the following comments:

• They suggest that in some respects present accounting standards are ‘an inferior system, [to UK GAAP], particularly in relation to audit judgements arising therefrom. We have sympathy with their concerns and have suggested a number of practical ways of dealing with it in our publication i.e. “The Future of Corporate Reporting and Assurance” published today;
• We agree with their contention that UK GAAP be allowed to continue for the time being for non-listed companies, until IFRS can be suitably adjusted to be ‘fit for purpose’;
• Their Lordships wish the UK regulatory and professional structure to become more streamlined. We concur.
• We note their extensive comment on the audit of the major UK banks, but would restrict ourselves from commenting in depth, as we were not auditors to any of them during the financial crisis.

The committee wishes a number of the matters above to be referred to the OFT. There are a number of other matters they wish the OFT to take up: 

Auditor liability: we believe that auditor liability should be proportionate to fees. A ‘ceiling’ level of liability would reinforce concentration in our view;

Wider ownership criteria for audit firms: we consider this to be incidental to the concentration debate;

A wider audit remit for the largest companies, including risk and narrative reporting: we believe assurance should be given over such disclosures, but not as part of statutory audit; and,

More restrictions on non-audit work: we believe current UK rules remain adequate.

Overall BDO believes the committee has provided valuable leadership to Government, regulators, the profession and audit firms in its report. We look forward to the debate it will create and to further investigation of the uneven playing field that is competition in audit services.

To see a copy of the report, click here.

Click to see 'The Future of Reporting and Assurance'

Notes to Editors

BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. A list of members' names is open to inspection at our registered office, 55 Baker Street, London W1U 7EU.  BDO LLP is authorised and regulated by the Financial Services Authority to conduct investment business.

The combined fee income of all the BDO Member Firms was US$5.026 billion in 2009. The global network has 1,138 offices in 115 countries and more than 46,000 partners and staff provide business advisory services throughout the world.

BDO is the brand name for the BDO International network and for each of the BDO Member Firms.

BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate within the international BDO network of independent member firms.