Tough battle over tender issues

When the RAC announced it was switching to a new accounting firm, the former auditor cried foul. Roger Trapp reports

Today the Royal Automobile Club in London's Pall Mall plays host to an annual meeting of its members that is attracting more than a little attention. The reason is that the club has signalled its intention to drop its auditors of 16 years, BDO Stoy Hayward, in favour of Price Waterhouse.

Though not unworthy of comment, this move alone would not have brought the curious to the organisation's door. After all, businesses of all sorts are getting used to the idea of putting such appointments out to tender. No, what is causing all the fuss is that Stoy has cried foul over the selection process.

In a letter circulated to the 13,500 people who are today being asked to approve the appointment of PW, it in effect claims it lost the job because of predatory pricing, or "lowballing", by its bigger rival. Such claims are not new. And they are not confined to PW, which has in the past been dubbed "Half-Price Waterhouse" because of its perceived fondness for the practice. They have been whispered - chiefly by second-tier and middle-ranking firms about members of the Big Six - since the recession of the early Nineties began to put pressure on fees. But this row is unprecedented because Stoy has chosen to make a public issue of it.

In a statement issued at the start of the affair late last month, PW insisted it did not indulge in predatory pricing in order to obtain new audit appointments. "The firm has no need to do so, and it would not be commercially sensible," it added, in keeping with the established Big Six line on the issue.

As evidence for its defence, PW cites the letter to members from the RAC chairman pointing out that all three of the potential new auditors - Ernst & Young and Arthur Andersen, as well as PW - bid below £200,000 in attempting to win the work that last year was carried out by Stoy for more than £300,000.

This by itself is no answer, of course. Instead, it might merely reinforce the view that "they are all at it". Certainly, a belief that the situation is becoming worse - to the detriment of the profession overall - appears to be behind the decision to go public.

It is easy to question Stoy's motives, especially since it admits that it reduced its 1994 price by £50,000 because of greater efficiencies and the recognition that it was facing competitive tender. This would not be the first time that an organisation or individual has appealed to the greater good in attempting to deal with some personal slight. But it is also important to realise that this is not a risk-free strategy for a firm that has made the headlines in the past - for its association with such corporate failures as Polly Peck and Astra. Not only does this move advertise the fact that it has lost a client it would rather have retained, it might also tempt existing clients to threaten to go elsewhere unless their fees are reduced substantially.

But the firm has made a conscious decision to do battle this time, at least in part because it believes that the RAC electorate - made up as it is of many sophisticated businessmen and more than a handful of accountants and lawyers - is in a good position to appreciate the issues. It has apparently received support from some in advance of the meeting.

The dispute also comes at a time when the whole concept of the audit is under consideration. Recent research which suggests that qualified audit reports are on the decline only reinforces the growing public perception that the exercise is becoming increasingly worthless, and little more than a commodity provided for compliance purposes.

In such an atmosphere it is felt by some that - whatever the lofty views of the Auditing Practices Board and the Institute of Chartered Accountants' newly launched audit faculty - the appeal of the audit to many firms of accountants is the access that it grants to other, more lucrative, forms of work. The RAC, for instance, is perhaps surprisingly a rather complex organisation that is about to undergo a good deal of change - and is therefore ripe for consultancy services.

But others in the profession claim that the very fact that the issue of auditor independence is under the spotlight is prompting many clients to look anywhere but to their auditors for other services. Indeed, there appears to be a schism between those companies that want their auditors to provide just about every other accountancy-related service and those that keep audit separate from everything else.

If the profession does not take a firmer stand on what might amount to loss-leading, say the likes of Stoy, a change of government might force firms to split their practices in this way. While such a solution might curb the perceived excesses of the largest firms, it would also hit Stoy and its counterparts lower down the league table, since it is their clients who tend to need a little accounting advice from their auditor but are unable or unwilling to pay substantially extra for it.

Nobody expects Stoy to win over the RAC rank and file today. But most agree that the aftermath will be interesting. Clark Whitehill, another medium-sized firm that in recent months has lost to the Big Six clients of the stature of J Sainsbury and the Woolwich building society, has taken up the issue behind the scenes.

Though the ability to provide specialist expertise, rather than fees, was thought to be the cause in each of those cases, the result would appear to be the same concentration of the choicest clients in a few hands. And that means, suggest the cynics, that this select group comparatively quickly reaches a point where it can force prices back up.