MPs' recommendation to forcibly break up the dominance of the 'big four' accounting firms to improve audit quality is fatally flawed. They should, instead, stimulate technological innovation to drive a higher level of performance throughout the industry - here's why.
More competition is healthy as a rule, but there is no clear reason why the number of firms serving the top tier of the market should relate to audit quality.
Auditors study a company's books in complete secrecy. The only time the quality of this work is subject to competitive pressures is when something goes drastically wrong.
Grant Thornton, for example, isn't one of the 'big four' but suffered terribly in the recent Patisserie Valerie debacle. Arthur Andersen was the biggest of the big five before it was killed off by the Enron scandal. Clear evidence that market dominance and audit quality are unrelated.
These big beasts have evolved because their brand reputation provides high profile audit committees with confidence. Big four players are cementing this leadership position by investing staggering sums in new digital platforms; these reduce cost and complexity across markets, analyse huge quantities of data and feature new analytics that helps produce a higher quality audit - and crucially - eliminate misdemeanours that can hide in large international groups.
These are hard measures for smaller players to match - and regulation won't change that dynamic. It may just drive up the prices of the larger firms as FTSE100 companies are forced to vie for their attention.
That said; there are some terrific opportunities for other players to increase market share. The focus of regulators should be on stimulating the vibrant second tier and mid-size market with technical innovation and collaboration.
When these firms can publicly prove they reduce risk and cost for audit committees, they will win more business and change the market dynamic- that's how competition works. Many firms are already doing this - they're just not getting the recognition they deserve. Notably, Mazars recently was appointed to audit Goldman Sachs - and the French model of large audits being shared by two independent firms that they promote is making waves in the regulatory community.
For communicators in mid-size firms this is the moment to speak with your partners and technology advocates and tell your story in a convincing way; through thought leadership, compelling internal communications, public relations, and advertising.
Regulation might stimulate action, but mid-size firms can do much more to provide additional stability to the market.
KPMG, Deloitte, PwC and EY – conducted the audits at all but one of the UK’s 100 biggest listed companies last year. “The big four’s dominance has fostered a precarious market which shuts out challengers and delivers audits which investors and the public cannot rely on,” Rachel Reeves MP, the Labour chair of the committee, said. “Our report proposes a range of measures to boost competition, improve the audit product, and ensure that the UK continues to be a world leader in corporate governance.”