Mario Christodoulou, Accountancy Age, Thursday 21 October 2010 at 00:45:00

Audit shakedown: The Big Four is preparing to face drastic measures to openup competition in audit


It?s June 2012. KPMG UK?s managing partner John Griffith-Jones has justwritten his second vociferous opinion piece in The Financial Times, protestingagainst new ?absurd? mandatory rotation rules which forced the firm to hand overits 32m audit of HSBC to rival PwC.

Meanwhile, Grant Thornton was announced a 12 % increase in assurancerevenues, owing in no small way to the abolition of Big-Four-only covenants andthe introduction of dual-audit across the EU.

An EU study has also shown that audit fees for small businesses have droppedas much as 25% following the introduction of the new ?limited audit?, howeverthere is a worrying increase in the number of frauds.

This scenario is one possibility under reform measures announced by EuropeanCommission internal markets commissioner Michel Barnier this week.

Barnier brought the same strident, interventionist style he has displayed inother financial sectors to the audit industry calling for wide ranging reformswith the potential to fundamentally reshape the market.

?The status quo is not an option, and will not be the option chosen by theEuropean Commission,? he said.

?Ifsome people think that this is a thing of the past, that we can start again withthe
</br>attitude of business as usual, don't rely on me to carry on in this way.?

The accompanying EC green paper represented a mixed bag of reforms, the mostextreme being the mandatory rotation of firms and the introduction of an EUregulator.

Meanwhile, the House of Lords economic affairs committee is holding its owninvestigation into audit competition, which this week offered a taste of thearguments yet to come to the European Commission.

In Deloitte?s submission it said the debate is ?largely of perception anddisclosure, not substance?.

Ernst & Young said it wants ?greater connectivity and co-ordinationbetween national audit oversight bodies?.

But it seems clear that whatever structure Barnier finally decides on, theBig Four will have to either concede market share, increase their exposure tolitigation or contend with more regulation.

At the highest levels of the profession there?s already an admission theaudit structure will have to change and consequently it?s likely we are seeingthe dying days of the static audit report, which has been described as ?out ofdate? even within the industry.

However, there was limited mention of liability reforms. Auditors have longcalled for safe harbours, to limit their damages should they be sued.

The tacit understanding in London was that any discussion of audit reformshould be paired with liability reforms. The idea being that the governmentcould supply a safety net, if auditors agreed to walk a much higher tightrope.

However, the proposed EC reforms suggest this is not a given and liabilityreform is not an assumed part of the initiatives.