Big Six edge out smaller audit firms: Sainsbury switch symptomatic of trend

Click to follow
WITH confirmation last week that J Sainsbury is to switch auditors from Clark Whitehill to Coopers & Lybrand, the Big Six account for almost every big balance sheet. Only two FT-SE 100 companies - Williams Holdings and Southern Electric - are still audited by medium-sized firms.

Clark Whitehill, whose work for Sainsbury helped it to 13th place by fee income in 1992/93, will now have just one large client - Smiths Industries. 'The choice of auditors is up to the audit committee, and every year we look at the whole question of auditors on a formal basis, but we have obviously found Clark Whitehill satisfactory,' says Christopher Taylor, finance director of Smiths.

Mr Taylor believes the personnel at Clark Whitehill are equal to those in the big audit firms. However, he confirms that the Big Six have repeatedly tried to lure Smiths Industries away. 'They tend to work very much on the 'old boy network',' he says. 'Sometimes you also get a cut-price quote, but you have to question whether it's the best service.'

Low-balling, as the practice is known, has earned some of the Big Six a bad name. There were blushes at Price Waterhouse a few years ago when rumours of its aggressive marketing tactics earned it the soubriquet Half-Price Waterhouse. But it is by no means alone in slashing its bills.

Marc Voulters of Casson Beckman, one of the smaller audit firms, tells how one client with multinational interests was repeatedly approached by the Big Six firm that audited the rest of its accounts, in an effort to secure the British business that Casson Beckman was handling. The Big Six auditor offered to do the work for pounds 1,000.

When the client then approached a partner at Casson Beckman in the hope of negotiating a reduction, he said the firm would pay it pounds 2,500 for the privilege of doing the audit. Fortunately, says Mr Voulters, the client got the point, appreciating both the absurdity of the quote and the risk of getting the service for which it had paid.

The reductio ad absurdum argument worked in this case but numerous small and medium-sized auditors complain of being squeezed out by the Big Six. Support for their claims comes from The Report of Audit Fees of UK Plcs, 1993, which covers the 676 companies in the FT-SE 'Non-Financials'.

According to Dennis Henry, author of the report, the Big Six saw average audit fees increase by pounds 17,000, with audit income rising in aggregate by 3.24 per cent, to pounds 296m, from the FT-SE Non-Financials last year. The smaller auditors saw average fees fall by pounds 11,250 and suffered an overall drop of almost 6 per cent in income.

The smaller firms cite a variety of reasons for this drift, including the claim that big auditors will undertake audits at a loss in the hope that they can then pick up management consultancy and other non-audit work. However, a senior partner at one of the Big Six denies this. 'I know of very few companies which put their audits out to tender just to get a lower fee. The reason is usually a breakdown in mutual confidence,' he says.

Other auditors make the same point. They add that a company will normally wait two or three years before changing its auditor, in the hope that nobody will attribute the change to a dispute. But money is also a key motive in making the switch. A study completed by Mr Henry in 1992 found that 52 per cent of companies went to tender to reduce costs, only 35 per cent to raise quality. Moreover, the tendering process produced an average reduction of 32 per cent.

Of the five top companies that have switched auditors in the past four years, three have negotiated substantially lower prices. Cable & Wireless moved from Coopers & Lybrand to KPMG between 1991 and 1992, with a saving of pounds 200,000, nearly 17 per cent of its audit bill. Rolls-Royce saved itself a similar sum when it made the same switch three years before. Finally, United Biscuits shifted from Coopers & Lybrand to Ernst & Young, with a 5 per cent cut worth pounds 46,000.

Only two top companies, Blue Circle and Tomkins, switched for other reasons and both, as it happens, from smaller firms. Blue Circle transferred from Pannell Kerr Forster to Ernst & Young in 1991.

'We'd been with Pannell Kerr Forster for ever and a day but because the group has changed its structure and size we decided we needed an auditor that could cover the whole business. Pannell Kerr Forster was too small,' said a spokeswoman.

A similar international expansion accounted for the switch from Moores Rowland to Arthur Andersen at Tomkins, says Ian Duncan, the finance director. 'The first thing the institutions used to ask us when we did a deal was why we weren't with one of the Big Six. But when they looked at the quality of the work done by Moores Rowland, they were very satisfied.'

Unfortunately, however, the American end of operations - actually a disparate collection of auditors trading under an umbrella name - was much less competent. 'So we formally warned them that unless they could get their act together we would go to tender the following year,' Mr Duncan explains.

His experience with the institutions lends credence to the claim that some pension fund managers see a Big Six auditor as a sort of insurance policy. But the National Association of Pension Funds takes a different view and has started monitoring the split between audit and non-audit fees, now that they are separately reported. 'The rationale behind that is, if there is a small audit fee and a large non-audit fee, the auditor may be inhibited from performing the audit properly,' says John Rogers, the association's secretary-general.

The Big Six insist that this is not a danger. 'The great majority of FT-SE companies go out to tender for their consultancy work,' says a spokesman from one Big Six firm. He adds that only 23 per cent of FT-SE 100 stocks have taken consultancy work from their auditors in the past two years. 'The real pressure on the auditor is that his security within the firm may depend on his client,' he says.

The evidence suggests that there is another form of pressure, though. Mr Henry's report shows that while large clients saw their audit fees rise by only 1 per cent last year, smaller clients suffered an almost 7 per cent rise.

'The only conclusion is that big companies are screwing their auditors while the auditors are screwing their smaller clients, in turn. Muscle counts,' he says.