The House of Lords Economic Affairs Committee is hearing evidence from interested parties as part of its current investigation into Auditors: Market Concentration and their role. The Committee is expected to report to Government in Spring 2011.
Last week, it was the turn of the mid tier firms where our own Managing Partner Simon Michaels gave evidence alongside David Herbinet (Mazars), Russell McBurnie (RSM Tenon) and Steve Maslin (Grant Thornton).
Simon’s evidence was based on a written paper BDO had previously submitted to the Committee. The evidence session dealt with a wide range of topics from auditing following the banking crisis, and in particular focussing on the dominance of the profession’s four largest firms.
Simon was forthright in his evidence. He emphasised the global size of the BDO network with revenues of over £5 billion and explained that it was thus able to audit all but the largest banks and other financial institutions and perhaps the global oil majors. He attributed the dominance of the ‘Big Four’ to an institutional prejudice that is reinforced by the big four alumni being in decision making positions at the top of british industry, and through a fear within audit committees of being seen to take a risk. He highlighted that investors want more choice and made reference to clear evidence that investors were very happy to see BDO as auditors of the largest companies in the land. He talked about audit quality and the need for it to be better understood. In this, he was supported by Grant Thornton. Simon also pointed out to the committee that the big four dominance has been shown to increase price in the market place and cited BDO’s own research into this issue.
In response to a plea for joint audits to be mandatory from Mazars, Simon made clear that in the long run a move to mandatory joint audits would not impact on big four dominance, but might exacerbate it. Tenons’ contribution to the debate was somewhat limited and to observers it seemed that they were content to ignore the larger UK corporate market.
Michaels closed the evidence session by urging the Lords to take advantage or what he felt was a ‘once in a generation opportunity’ to make a real change to the face of the audit profession and to urge intervention to encourage investors in companies to bring about the widening of competition in the market, through regulation if need be.
This was particularly important in that if one of the existing, dominating, firms was to exit the market, perhaps as the consequence of litigation, the underlying effect on worldwide capital markets could be a major source of concern.