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MP demands end to Big Four audit monopoly. By Dan Martin

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17th Jul 2006
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The government should break up the Big Four accountancy firms' monopoly over the auditing of the UK's biggest companies, an MP has urged.

Austin Mitchell, Labour MP for Great Grimsby, tabled an early day motion in the House of Commons in which he criticised the dominance of Ernst & Young, PricewaterhouseCoopers, KPMG and Deloitte over auditing big businesses as "anti-competitive, unhealthy and [promoting] complacency within the industry".

Mitchell added the fact that 99% of FTSE 100 and 97% of FTSE 250 firms are audited by one of the Big Four "could affect audit quality and increase the risk of corporate wrongdoing going unchecked".

He called on the government to "initiate an urgent debate about how to break up this monopoly and to ensure that the public interest is better served by a fairer, more competitive and more open audit market".

The MP's comments follows the publication of a Financial Reporting Council sponsored report earlier this year which investigated choice in the UK audit market and opened a debate into whether the Big Four's monopoly should be broken up.

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Richard Murphy
By Richard Murphy
18th Jul 2006 12:02

Now who can argue against comeptition?
Austin has to be right, on this score (and others).

The market for audit services clearly is not competitive. So regulatory change is needed.

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By keith.donovan
19th Jul 2006 13:30

It's an oligopoly, not a monopoly
I am far from convinced by interventionists who call for interference in a mature free market so that the market can be allowed to work.

The usual benefits claimed for market competition are the driving down of prices and the removal of any scope for superprofits. Are those the problems to which enforced "competitiveness" is being proposed as a solution? The problems Mitchell and co see are all shadows with no evidence that they exist, with no evidence that they do not exist among non-Big-Four firms, and no explanation why a "fairer, more open" market would somehow not suffer from them.

There is no embargo on large companies appointing mid-tier firms; nothing other than market forces driving them to appoint a Big Four auditor. But this apparently needs to change. Do you therefore ban large companies from appointing a Big Four auditor, or ban audit firms from acting for more than say ten FTSE 100 companies? How would that work? Where's the free-market mechanism in that?

If not that, do you force the Big Four to break themselves up into smaller firms? DO you force a number of smaller firms to merge and become Big? What does the market look like once the "monopoly" is "broken up"? Should we expect a big five or six, or a medium-large few dozen?

The Big Four are a long way from complacent; what happened to Andersens is still a constant reminder. Each partner is aware they could bring the entire firm down around them. The recent strengthening of the involvement of audit committees in the conduct of the audit of listed companies also acts to keep auditors on their toes and reduce the likelihood of complacency.

The Big Four are also very competitive among themselves. Their hold on the market is the result of the actions of a free market, with large purchasers choosing large suppliers.

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By martinfoley07
19th Jul 2006 15:31

I would think that.......
.....most folk would agree that a "Big 8" would be much preferable to a "Big 4".

Unfortunately however one does doubt A.M.'s good faith on the matter given his mixed track record of raising bogus issues and petty point scoring rather than making concrete suggestions for positive change.

But Keith nails the entire discussion - "pure" of "free" markets will usually generate the optimium economically efficient macro solututions overall. Even the most doe-eyed of folk at last seem to accept that fact. There is little to suggest the audit market for big companies is showing any abberations in this regard at all. On the contrary.

But of course for perfectly proper political and social reasons, the other (ie non macro economic) consequences of "pure" or "free" markets are sometimes deemed undesirable. Fair enough. But where on earth is the evidence and link between the deemed undesirable consequences of having a Big 4 and the total lack of suggestions as to how these are supposed to be overcome by doing something - er, what? Of course, A.M. (and Richard M) would like a talking shop - how about flying some real kites and suggestions rather than phoney kite flying?

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By John Snowden
19th Jul 2006 13:12

Increasing regulation..
and rising exemption thresholds are inevitably going to lead to concentration of audit activity in the hands of the big firms, aren't they? I do not suppose the Government or MPs for that matter have considered this at all.

Why not just get the DTI to carry out all audits? That, and massive simplification of the tax system (and a banning of the notion of "the right amount of tax"!) would allow us accountants to get on with looking after our clients more productively than we can at the moment.

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By AnonymousUser
19th Jul 2006 18:15

Choice in the UK audit market.
When the Financial Reporting Council has issued a discussion paper on choice in the UK audit market. When an increasing number of investors such as myself are voting against the appointment of Big Four auditors at members meetings. When regulators in the USA and Japan are taking firm action against the Big Four over adventurous accounting scams. When even the Big Four are indicating that the market has become too concentrated. It may be wise for accountants to decide two points:

1. Where does their duty of care lie as far as the audit report is concerned; is it with the day-to-day managers of a company or is it to the owners? Hint: Who votes for their appointment and to whom does the auditor formally report?
2. In my contribution to the discussion paper above, I have suggested that there should ideally be 20 firms competing for the audit work of large quoted companies with 10 being set as the minimum. Choice is an essential requirement in any healthy free-enterprise market. Cornered markets have often in the past had to be fragmented by government action. OK, ideally the investors should have done it – but none of us are perfect!

The discussion paper is still open for comment till 4th August. Investors look forward to seeing how accountants feel on this issue.

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