NEIL CRAIG

The Financial Reporting Council (FRC) recently published the final report of its Market Participants Group. The report has been a year in the making and listed 15 recommendations designed to tackle the continuing dominance of the Big Four accountancy firms in the UK market.

The Group, a mixture of practice professionals, investors and financial directors, was established by the FRC in the wake of the Oxera report.

Oxera, released in April 2006, highlighted the control the Big Four firms have over the fully-listed company audit market - currently a 97% market share of auditing FTSE-350 companies.

While we recognise that this is not something that can be solved overnight, we remain disappointed that the recommendations made by the Group are unlikely to have any impact on the status quo, something partners in Big Four firms have readily admitted.

The results of a study we commissioned of the investment community to gauge their views on this debate, undertaken prior to the publication of the Group's recommendations, only serves to heighten our disappointment, as we believe they make the case for greater competition more compelling than ever.

Our study, conducted by Ipsos Mori, revealed that the dominance of the Big Four is exacerbating a decline in trust in audit quality - trust that has already been eroded due to the collapse of Andersen, Enron, Worldcom, and so on.

A quarter of all respondents claimed that lack of competition could be breeding complacency among those firms with a stranglehold on the market, while at the extreme end, 5% of respondents even said they feared cartel arrangements among Big Four firms as a result.

Half of those polled also gave non-Big Four firms a resounding vote of confidence and said they would have no concerns if a listed company switched to a non-Big Four auditor.

However, four out of ten said they would have concerns, and most alarmingly, such a switch would make one third of investors consider reviewing their investment decisions.

Yet, when asked what they considered to be the shortcomings of a non-Big Four firm, more than a quarter were unable to name a single drawback. In short, 40% of respondents would be worried by a change to a non-Big Four auditor, but were unable to give a reason why.

We believe this evidence points to some form of underlying prejudice, which must be tackled if we are to see a change in the market.

Major firms like BDO Stoy Hayward have the capability, expertise and international reach to service all but a handful of companies. The research detailed above indicates that only a minority of the investment community would disagree with this.

What's more, we recently chaired a round-table based on our research at which Paul Boyle, chief executive of the FRC, noted that if one of the Big Four were to disappear, or be forced to withdraw from the marketplace, it would lead to a lack of capacity to supply high-quality audits that could be absorbed by the other firms.

While such a scenario may seem improbable, the problems at Northern Rock illustrate how people tend to underestimate the chances of a catastrophe.

The report published by the Market Participants Group could have gone some way in further diminishing the likelihood of such a catastrophe if it ensured that more than just the Big Four are able to take on the audits of large corporates.

Non-Big Four firms have to be given access to the marketplace now if we are to be a credible supplier of audit services should any such disaster become an occurrence.

However, the Group's failure to give a strong signal to the market about the kind of prejudice noted above, leads us to conclude that it has squandered a golden opportunity to address the challenges facing our industry and remove a real barrier to competition.

  • Neil Craig is managing partner at BDO Stoy Hayward in Scotland.