THE GOVERNMENT’S employment minister has “serious concerns” over a lack of competition in the audit market, and has urged company audit committees and shareholders to encourage companies to use accountants outside the Big Four firms to improve choice in audit services. Ed Davey, who is also minister for consumer and postal affairs, yesterday told a House of Lords inquiry into the audit industry that using regulation to improve choice within audit services was not the government’s “first approach,” but did not rule out this out should other approaches fail.
His suggestion of industry-led reform of audit services is likely to be viewed with relief by the Big Four firms amid speculation that they may be broken up in order to improve competition in auditing.
“Our major concern is to improve competition,” Davey told peers on the House of Lords Economic Affairs committee. “Can we persuade companies to change auditors more often? I want to say quite firmly that there are [accounting] firms outside the Big Four who are quite capable of auditing FTSE 100 companies”. Davey also appeared to rule out making it compulsory for companies to switch auditors, saying that it in Italy this rule had increased rather than decreased the concentration of audit services. The Big Four firms audit all but one of the FTSE 100 companies, prompting Lord Myners, the former City minister to claim last week in the previous evidence session that their dominance poses a “systemic risk” to the economy and may have to be investigated by the Office of Fair Trading. But giving evidence to the last session of the inquiry, Davey denied that the Big Four’s dominance of auditing in large companies poses a systemic economic risk. However, he urged the leading firms to consider drawing up “living wills” – plans that would allow them to wind themselves down in the event of bankruptcy.
Peers raised concerns that bank auditors, with their insider knowledge and access to reams of information, had failed to see the banking crisis coming.
But Mark Hoban, financial secretary to the Treasury — a chartered accountant and former employee at PwC — was broadly supportive of his former profession, saying that auditors “weren’t alone” in not predicting the financial crisis. The inquiry is due to publish a report on the audit industry in the spring. The government will then publish a response to this report within two months.
The committee has quizzed senior figures at the Big Four and mid-tier accounting firms, and accountancy institutes as part of an exhaustive examination into the impact of the Big Four accountings firm’s dominance of the audit market. The inquiry has discussed issues including the role of auditors in the banking crisis; quality and reliability of audits; and whether the provisions of management consultancy services to audit clients weakens auditors’ independence.