Almost five years after the UK government first started talking about the lack of competition in the UK statutory audit market, the new UK Financial Reporting Council (FRC) chairman Sir Winfried Bischoff told the Treasury Select Committee appointment hearing that audit firms outside of the Big Four lack competencies for large scale global audits.
Bischoff, the former chairman of Lloyds Banking Group, said that in ideal circumstances he would like to see a "Big Six market especially in light of rotation rules", but added that "it appears to be hard to find in the next group of auditors those who really feel that they have the competencies on doing audits for large global corporates".
While the FRC does not have a completion remit, Bischoff said he would "support more completion if it could be done and if those providing competition had the equivalent competencies".
Bischoff also said that concentration is most acute in the FTSE100 market and not as present in the FTSE250. However, only about 11 audits are tendered to the mid-tier in the FTSE250 and the rest of the 239 to the Big Four, which has been one of the main reasons behind last year's Completion Commission (CC) remedies report, which called for mandatory retendering of audit firms.
He also said that the mid-tier audit firms are a lot more focused on mid-size companies and in his experience as a corporate who hires auditors. "You do tend to look at the resource capability and most of the mid-size firms have orientated their business model around the medium size companies for example in the FTSE250 and FTSE350 market," he said.
While Bischoff was speaking to the Treasury only as a formality to confirm his appointment his comments on competition might come as a bit of a surprise as the FRC has been an advocate of increased competition in the statutory audit market and has implemented changes to the UK Corporate Governance code to that effect.
Writing to the CC in the evidence gathering phase in 2011 the FRC clearly stated that concentration in the audit market is an international issue and suggested to the CC to closely examine: infrequency of audit tenders; ownership rules of accounting firms; Big Four acquisitions of smaller market players and the effects of one of the Big Four leaving the market.
Industry response
Soon after Bischoff hearing, the Institute of Chartered Accountants for England and Wales (ICAEW) chief executive Michael Izza rushed to comment that it is important to remember the quality of the mid-tier players in the market.
"Sir Win highlighted the challenges linked to finding firms below the largest audit firms with the right level of expertise to help international companies. However, it is important to remember that there is quality also below the Big Four audit firms," Izza said.
"The companies, and especially the audit committees of corporates, have a responsibility for looking for this quality and considering all options when appointing an auditor."
BDO UK senior audit partner James Roberts said at the moment it is still early for Bischoff in this role and "I would expect him -especially having experience in the large financial services firms in the world- to have that familiarity at this stage" .
"I don't think his comments were wholly unfair as we have always been open that there are probably 30 to 35 financial services companies that we do not have the depth skills to act," Roberts said.
"There are good reasons for that especially as bank audits only came up once every 50 years historically and we wouldn't keep three generations of audit teams on the bench hoping one day this tender is going to come up. But outside the top 30 top 35 we have no problem at all."
Banking crisis role
At the appointment hearing Bischoff was also confronted by scepticism about his role in the banking crisis and whether he is the right man for the FRC job, however he fought the speculation by stressing he joined Lloyds Banking Group as well as Citigroup post the crash in 2007 and his management decisions have led to significant improvements.
Bischoff succeeds Baroness Hogg at the helm of the FRC and has several important pending projects on the table with the FRC's actions likely to be under the watchful eye of the profession; however his strong views on competition expressed to the Treasury are likely to echo for some time especially as mandatory rotation compliance approaches.
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Related links
Treasury Select Committee appointment hearing
FRC evidence to CC