Plan to break Big Four's audit grip

Smaller accountants hope mandatory rotation report will end 'anti-competitive closed shop'
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The Independent Online

The Competition Commission is set to crack the dominance of the Big Four accountancy firms with proposals for sweeping market reform this week.

Former Slaughter & May lawyer Laura Carstensen has spent the past year probing the audit market, which sees more than 95 per cent of FTSE 350 company accounts looked after by either PricewaterhouseCoopers, Ernst & Young, KPMG or Deloitte. Mid-tier firms such as BDO and Grant Thornton have argued that this represents an anti-competitive closed shop that is ultimately costly for the companies that are audited.

It is believed that Ms Carstensen's inquiry team will advocate a form of "mandatory rotation", that would see firms automatically moved on from auditing a business's accounts after a set number of years. This will be widely criticised by the Big Four, as some academic studies have shown that this does little to help foster greater competition and forces audit committees to get rid of accountants that they think have done a good job.

A senior source at one of the Big Four said: "Our position has long been that mandatory rotation actually takes away decision making powers from audit committees, as it tells them to do something that they might not want to do. There is a risk that hiring someone else could be detrimental to the quality of audit."

However, as this is a provisional report, the proposals are expected to remain vague enough to consider such arguments. A source from an accountant that has been critical of the structure of the market said that mandatory rotation could also involve a recommendation that a non-Big Four firm is always part of the tender process.

Ms Carstensen's team would be pressed to consider such an idea as it would ensure that mandatory rotation didn't just mean that a company simply passed the audit role among the Big Four every few years. If that happened, market dominance would only be reinforced.

A spokesman for the commission declined to comment on the details of the findings, but did say that he hoped the interim report would be published this week. The commission has had an extremely busy month – for example, last week it provisionally recommended lifting outdated advertising price caps on the Yellow Pages – so there is a possibility the publication could slip to the end of the month.

Under the current timetable, the final report with definitive recommendations is due in August.