In having Elizabeth Llewellyn-Smith, principal of St Hilda's College, Oxford, in the chair, the group certainly started off with a double advantage. Not only was she independent of the institute, she was also a former civil servant who, in her own words, "did not come cold to the issue" because between 1982 and 1987 she was deputy director-general of fair trading. But although the resulting document is as comprehensive as might be expected in the circumstances, there is a feeling within and outside the institute that nothing much has changed.
Reflecting the apparently unanimous view of larger users of accountancy services given to the working party, the report published last week found no evidence that these clients were "unduly affected by competitive pricing to the exclusion of other considerations". This statement, of course, leads one to two immediate assumptions.
First, just because large companies say they do not choose auditors on price alone (and they would say that, wouldn't they?) does not mean that Big Six auditors do not try to woo them from each other, or from firms outside this club, by undercutting the competition's fees. In other words, it does not seem as if the working party has concluded that "lowballing", to give the subject its colloquial name, does not exist.
Second, it implies that such lofty sentiments may not be the norm at the lower end of the scale. Indeed, the report found that smaller clients, "to whom audit appeared to be a costly and unproductive necessity", were more likely to look solely for the cheapest audit in order to fulfill their statutory obligations. The working party, which included Ian Hay Davison, chairman of Storehouse, and Peter Wyman, Coopers & Lybrand's tax partner, said members should be encouraged to recognise that "in the long run their interest lies in competing on quality, not on price". It also urged that the value of a full and professional audit should be brought home to users.
The likes of Gerry Acher, head of audit at KPMG and chairman of the institute's recently-established audit faculty, point out that this principle is just as applicable at the top end of the market.
If, however, this indicates that the profession sees a clear division between price and quality, it is in danger of running up the wrong track. Auditors need only ask their own clients what happens to a company that tries to compete purely on quality - or, for that matter, price. The two are not nearly so opposed as some of those debating the report at last week's institute council meeting seem to suppose.
There is a perception that the audit has become so tarnished, chiefly due to accountants telling the world how limited it is in order to absolve themselves of blame for corporate collapses, that it has in many cases become a commodity that clients buy because the law requires it, and the auditor sells because it is a route to more lucrative things. This was the undercurrent behind the RAC affair, the episode largely responsible for the setting up of the inquiry. When it aired its grievances in public in May, BDO Stoy Hayward, the incumbent auditor, was clearly suggesting that it had lost its client to an uneconomic bid from a larger rival, Price Waterhouse, that presumably aimed to recoup its money by picking up fees from other work.
Large firms claim that it is no longer as simple as that; indeed, developments in corporate governance and greater interest in the affairs of accountants and their clients mean that large companies take care to avoid giving more work to their auditors. Hence there is no need to change the rules to bar this sort of activity. But given that these firms have said the same sort of things about independence of auditors from clients, only for Ernst & Young to find itself in a position where BTR, one of its largest audit clients, has a former partner as finance director and the immediate past senior partner as chairman, it is hard to follow this argument.
In that sense, there is much to be said for Stoy's suggestion to the working party that either the chartered accountants' joint ethics committee look at producing tougher guidelines on this issue or that the successor to the Cadbury committee add provisions on it to the corporate governance code.
But Stoy and firms like it should not always assume that they are losing out on price alone. The easiest way for a client to obtain a cut in fees is to approach the incumbent. What is just as likely is that through advances in information technology and the like, some firms are devising ways of doing the audit differently. The driver for this is to reduce the price so as to pick up share in an over-capacity market, but the proponents also claim that it will produce improvements in quality.
The product is bound to be more commercial. Whether or not it will also be more robust than the one found wanting at the beginning of this decade will not be known until those sorts of conditions repeat themselves.Reuse content