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Big Four audit drop out 'would bring market risks'. By Dan Martin

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17th May 2006
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The Big Four accountancy firms' dominance over auditing blue chip companies means if one dropped out of the market many large UK businesses would struggle to find an auditor, the Financial Reporting Council (FRC) has said.

In a discussion paper on the blue chip company audit market, FRC said it was up to the Big Four companies to prove they are effectively managing the risk of collapse or face the possibility of outside regulation.

FRC said that under current conditions if either KPMG, Ernst & Young, Deloitte or PricewaterhouseCoopers left the blue chip sector "a few large companies would be unable to find an auditor with appropriate capabilities."

It added that it would also cause "concern for companies and investors and a risk of disruption to the markets, at least in the short term."

The new paper follows publication last month of a government and FRC commissioned report which concluded that the Big Four's stranglehold over the auditing of blue chip businesses was unhealthy for competition and prevents smaller firms from winning such clients.

It showed that 97% of the FTSE 300 companies are currently audited by one of the Big Four and claimed that under current condition entry by a mid-tier firms is "unlikely".

The report was discussed by audit market stakeholders at a meeting held by the FRC in April, the conclusions of which the discussion paper reveals.

"Any measures designed to promote choice would take time to have any significant effect and, therefore, risks arising from the competitive environment are likely to persist for some time."

Financial Reporting Council

Among the more radical options put forward are significant regulatory invention in the functioning of the market including mandatory auditor rotation, the forced break-up of the Big Four firms and compulsory transfer of clients to a non-Big Four business.

"Any measures designed to promote choice would take time to have any significant effect and, therefore, risks arising from the competitive environment are likely to persist for some time," FRC said.

"In the meantime, there are risks that one of the Big Four firms (or indeed, any non-Big Four firm providing audits to large companies) might leave the market, voluntarily or non-voluntarily.

"In these circumstances it is appropriate to consider ways to reduce the risk of a firm leaving the market. This might be particularly relevant when the threat to a firm is caused by damage to its reputation prior to the full circumstances of a problem being known."

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