Grant Thornton abandons the blue chip audit market
The UK accountancy firm Grant Thornton has said it will no longer bid for audit contracts from Britain’s largest listed companies. The UK’s fifth largest accounting firm claimed it’s too difficult to compete with the Big Four firms that dominate the market.
GT will continue to audit its five existing FTSE 350 clients: Interserve, Sports Direct, the Witan Investment Trust, the Woodford Patient Capital Trust and JD Wetherspoon.
Sacha Romanovitch, chief executive of Grant Thornton, explained in a statement: “Structures in the [FTSE 350] market make it impossible for us to continue to succeed in it. If this space is dominated by four players and there does not seem to be market appetite to change, let’s focus on areas where we can [succeed]. You have to have that strategic clarity.”
Grant Thornton’s business is another blow to the competitiveness of the audit market. The Big Four’s share of FTSE 350 auditing has increased from 95% to 98% in the last five years, despite a series of UK and EU reforms designed to curtail their influence.
Prem Sikka, professor of accounting and finance at Sheffield University, told AccountingWEB that GT’s action is “a statement” about the audit market’s barriers to entry. Barriers not only in terms of the infrastructure you have to build domestically and globally. But other barriers too.
“Many of the Big Four alumni work for their former clients. Carillion’s last three FDs had KPMG links,” he said, referring to the recent, disastrous collapse of the government contractor Carillion. “These people favour the firms they come from. That’s a barrier that can’t be easily negotiated.”
The Carillion case has brought the anxiety over the Big Four’s audit oligopoly to critical mass. The political post-mortem has been particularly brutal. “I wouldn't hire you to do an audit of the contents of my fridge,” MP Peter Kyle told Big Four auditors at a hearing on Carillion’s collapse. During another testy exchange, the Big Four were accused by Frank Field MP of “feasting on the carcass” of Carillion.
The FRC didn’t escape censure either, with MPs labelling the watchdog as “useless”. Earlier this month, it was reported the FRC’s chief Stephen Haddrill met with the Competition and Markets Authority (CMA) to look into potentially breaking up the Big Four’s audit dominance.
Haddrill proposed forcing Deloitte, EY, KPMG and PwC to spin off their UK audit arms into separate businesses. He told the FT, “There is a loss of confidence in audit and I think that the industry needs to address that urgently. In some circles, there is a crisis of confidence.
“It’s one of the steps,” said Sikka. “The CMA has had two inquiries into this market, and they’ve done nothing. They were beaten off by the political and financial resources of the big firms. It would be an appropriate move, but it does nothing to decrease their domination. They’ll still be auditing 98% of the FTSE350 market.
“It doesn’t solve the problem of bringing more players into the market.”
Another proposal is expanding auditors’ responsibilities. A “front-to-back” audit would check every quantitative statement made in a company's annual report. This might strengthen shareholder confidence, but it would potentially create an onerous workload.
But again, Sikka is dubious. “What makes the FRC think that if they extend the role of the audit, the auditors will be able to deliver? There are many other questions that must be addressed first.
“The problems are at many levels. The organisational culture of accounting firms. If you want a partnership or a salary increase, you need to grow the business and not lose a major audit client. The focus is all on the profit and money. And the time budgets keep getting reduced. The FRC has paid no attention to this.”
A good place to start, according to Sikka, is to open audit up to public accountability. “Go to a company AGM, there’s one resolution every year that’s not accompanied by one word of additional information: the resolution around the appointment of the auditor. In the absence of critical information, people can’t make informed choices.
“We need more public information to act as a pressure point on auditors to improve the quality.”