The End of the Big Four?
Last month, in twin salvoes, PWC’s UK chairman and EY’s global CEO rejected growing calls for the dismantling of the Big Four accountancy firms.
Described by MPs as a “cosy club incapable of providing the degree of independent challenge needed”, Big Four executives have consistently shrugged off calls for them to separate their core audit work from their highly profitable consulting arms, citing a loss to their clients of audit quality or the ability to inject sector insight into the corporate audit process.
The Big Four are responsible for 75 per cent of total fee income from the sector. KPMG may be the smallest of the Big Four but, with earnings of $26.4bn in 2017, that was still three times as much as its next nearest competitor BDO earned. The Big Four’s share of the FTSE 350 increased to 98 per cent despite growing efforts by both UK and EU competition authorities to enhance contestability within the UK and EU markets. With an almost unassailable hold on the FTSE 350 market, competition is still far from a reality for corporates seeking a new audit partner.
So, the British Government has now called on the Competition and Markets Authority to take a look at the audit market to assess whether public policy concerns about the market power of the Big Four have merit, and whether they are indeed fostering poor audit quality and creating conflicts of interest, as their detractors claim.
There is no doubt that pressure is mounting. In June 2018, Grant Thornton announced that it would no longer bid for new audit work from FTSE 350 companies. Chief Executive Sacha Romanovitch said their decision to stop bidding was due to the hefty cost associated with participating in tendering processes, reportedly starting at an eye-watering £300,000. The Big Four’s critics maintain the sky-high price tag and the slender chances of success would make competing with the Big Four an uphill struggle for any firm outside the club.
Month by month, the list of critics has been growing and now includes within its ranks the Labour and Liberal Democrat frontbenches as well as the Financial Reporting Council – the auditors’ own regulator.
Among the more high-profile governance failures have been those relating to British Home Stores and Carillion. Interestingly, it transpired during the parliamentary scrutiny of the collapse of Carillion that each of the Big Four had been used by Carillion at different times. But both BHS and Carillion have shed light on the lack of accountability at the boardroom level: shareholders routinely vote to retain auditors, with 97 per cent of Carillion’s shareholders voting to approve KPMG’s appointment in 2017, against an average of 95 per cent shareholder approval for auditor appointments. Since non-audit work totals 80 per cent of fee income across the Big Four, it is all too easy to see why critics maintain the Big Four have an added incentive to prioritise a harmonious relationship with their clients, so they can cross-sell more valuable consulting work.
As the CMA ponders whether to hold a light-touch six-month market inquiry, or the full-blown two-year market investigation that the Big Four fear, corporate clients, politicians and consumer groups alike are wondering whether the CMA, under its new chairman, really does mean business.