LONDON May 24 A UK competition probe could
define the future of the "Big Four" accounting firms after the
European Union delayed its reform of the multi-billion euro
sector until after it reports.
KPMG, PwC, Deloitte and Ernst &
Young check the books of nearly all blue-chip
companies in the world and many policymakers want this
"oligopoly" cut down to size so that the EU's 8,300 listed
companies have more choice of auditor.
The Big Four are also under the gun for giving clean bills
of health to banks just before they had to be rescued by
taxpayers in the 2007-09 financial crisis.
But the delay by EU lawmakers is leaving smaller auditors
worried that a rare chance for real change may slip away.
The EU parliament and member states are approving the law to
make it easier for those smaller firms such as BDO, Grant
Thornton and Mazars to build up market share.
The lawmakers will delay approval until the autumn so they
can examine the initial outcome of a UK Competition Commission
probe into Britain's audit market, due around October.
"The initial views presented by the Competition Commission
will be one of a number of factors considered when designing the
future of the audit market in the EU," said Sajjad Karim, the
British Conservative lawmaker responsible for the law in the
The longer wait has generated even more uncertainty for the
industry, ratcheting up lobbying by the Big Four and their
rivals to levels lawmakers say they have not seen before.
"The UK Competition Commission will be landmark and without
precedent in the audit market. I think it will show deficiencies
in the market," said Antonio Masip Hidalgo, a Spanish
centre-left lawmaker in the EU assembly.
The UK watchdog will also publish "working papers" over
coming weeks which should also give a flavour of its thinking.
NO STATUS QUO
The Big Four hope the Competition Commission will require
only modest "remedies" in the UK, such as pressure on the
country's top 350 companies to change auditors every 10 years or
explain why not, something Britain's Financial Reporting Council
regulator is already working on.
Barclays bank has used the same auditor, PwC, since 1896.
"A potential result is to come out and say there is no issue
at all but I am not sure that is likely. Even so it's hard to
see they would do anything dramatic like cutting up firms," a
senior official at one of the Big Four firms said.
Smaller auditors hope the UK watchdog will require tough
measures so that efforts by the Big Four to water down the EU
law will be harder to justify.
"If the Competition Commission came out with a view that it
can't see an issue with market concentration then that would be
extremely unhelpful for the European dynamic for change," said
David Herbinet, a partner at Mazars.
There is already too much momentum for EU change to be
stopped completely by any "negative" UK outcome, Herbinet added.
Industry officials hope the Competition Commission, seen as
independent and respected, will come up with effective ways to
boost competition as EU lawmakers are heavily lobbied and
struggle to find a consensus.
The industry is deeply polarised and some of the proposals
in the EU reform are seen as unworkable. Lawmakers want more
time to depoliticise the debate.
"As such the UK Competition Commission is feeding the
content and pace of the Brussels process," a senior official at
one of the smaller auditors said on condition of anonymity.
"The European Commission's own competition officials are
also keeping a close eye on the UK and on the EU draft law to
see if either of these truly addresses the market structure
concerns," the official added.
VERY BIG FOUR
Andrew Brown, chairman of the European Group of
International Accounting Networks and Associations, said the
auditing market has been stagnant for a decade with the gap
between the Big Four and the rest remaining "huge" though
officials from the top firms say competition between them is
The Big Four, in revenue terms, have become bigger than many
of their clients.
KPMG had a European turnover of 4.6 billion euros in the
year to Sept. 2011 and employed 32,800 staff - without counting
its operations in Italy and France. Fee income last year in all
of Europe for BDO, the fifth-largest auditor, was under 2
In Germany, just two of the Big Four dominate auditing of
the larger companies and Brown said even a merger of BDO and
Grant Thornton, the sixth-largest firm, would create a group
that was still only a third of the size of the smallest of the
In a bid to create more competition the EU draft law
proposes "pure audit firms" or splitting up an firm's auditing
and advisory services if they have more than a certain market
There is a proposed ban on many advisory services that can
be offered to a client who is being audited.
Users of auditors would also have to "rotate" or switch to
another firm after six to nine years, a step the United States
is also considering
Smaller auditors say it is difficult to justify expanding
their operations unless there is some regulatory intervention to
attract bigger clients.
Few expect the Big Four to be split up and many of their
smaller rivals don't see this as a silver bullet in any case.
Instead smaller auditors want to make joint audits mandatory
or at least create strong incentives for companies to have them.
This refers to two auditors checking the books of a company,
with at least one of them from among the smaller auditors.
France has mandatory joint audits, allowing auditors like Mazars
and Nexia to gain more experience and market share.
"When you look at audit fees in France, they do not seem to
be much higher. There is also much more rotation of audit
mandates than in some other countries," said Stephane Marie, a
partner at Nexia.
Big Four officials scoff at what they see as "self
interested" attempts by smaller rivals to promote joint audits
to win more business, but some EU lawmakers are trying to insert
mandatory joint audit provisions into the draft law.
This is raising hopes among smaller firms who see it as the
best way for investors and big companies to become more
comfortable with lesser-known auditors.
Many of the smaller auditors simply would not have the
resources to check the books of a large multinational client on
their own in any case.
"My beef is that shareholders don't understand they are
being short-changed," said Geoff Goodyear, chairman of Russell
Bedford International, a chain of smaller auditors.