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Big 4 – Can The Strangehold be Broken? September 27, 2011

Posted by Audit Monkey in The Joy & Pain of Internal Audit, The State of the British Nation.
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Some months ago, one of the blog readers sent me a link to an article by Robert Preston, the BBC Business Editor who asked “Can the Stranglehold of the Big 4 Be Broken?” A synopsis; the Big 4 accountancy firms, KPMG, Ernst & Young, PWC and Deloitte audit virtually all of the FTSE 100.  The OFT (Office of Fair Trading) in the UK is worried about the lack of competition, and the possibility that the Big 4 are charging more than they ought.

The other sticky point is the possible lack of Auditor objectivity given that FTSE clients rarely change their External Auditor. Evidence that the audit client may have become too symbiotic is that the External Auditors didn’t raise too many red flags, if at all, before the banking crisis in 2008.

The perception is due to the lack of competition, the Big 4 firms are charging more than they ought for performing statutory audits.  If there was more competition, so the theory goes, audit fees would be cheaper.  However, even if the OFT stated the Big 4 should drop their UK based FTSE clients, because the Big 4 are global, they would still audit the global elements of their UK clients.

Audit Monkey’s take.

The first problem is a logistical. PWC has audited Lloyds Banking Group (LBG) for the past 130 years. If the Board of LBG decided to switch auditor (yes, I know a change of Auditor has to put before the Shareholders at the AGM), the sheer agony that would cause within LBG would be immense.  Just think about all the management time that would be spent in planning sessions with the new auditors, copying of documentation, etc, would be simply be horrendous. No wonder the external audit is never re-tendered, it isn’t worth the ball-ache.

The second problem is the remainder of the Top 10 accountancy firms in the UK haven’t got the staff to audit any new FTSE 100 clients.  I know the Partners of BDO and alike would probably argue otherwise but second tier firms are trapped in the paradox that they remain small because they are small.  Sadly, there seems to be a ‘added value’, irrespective of whether this is the case, in having a Big 4 firm sign off the accounts

(Digressing, say a second tier firm snared a big FTSE 100 client, wouldn’t the staff from the Big 4 be made redundant or be TUPE’ed over and walk over to the second tier firm? I’m aware this has happened in healthcare in the Public Sector where a firm A has taken over the Internal Audit from firm B and the staff from firm A have been TUPE’ed over. The client expecting new faces to appear have been rather surprised to see the old ones come through the door!)

Third problem. The Big 4 firms are profiteering and over charging is a nebulous one. I have it on good authority that the margins on external audit work are pretty slim and the big money is made from consultancy. Of course, this explains why young graduates are used on statutory audits as they are cheap as chips, will work silly hours to be considered virtuous until the penny drops. However, don’t all professions overcharge? How do you think solicitors get rich?

And lastly, don’t you think this is a situation of Regulators own making? First up, truth be told, the merger between Price Waterhouse and Coopers & Lybrand in 1998 (reducing the Big 6 to Big 5) should never have been allowed by the OFT. Christopher Pearce, the then Finance Director of Rentokil commented that mergers “reduce the choice for auditing services and increase the conflicts of interest”.

Second, given the amount of disclosure which is required in Financial Statements is so vast, you need an army of auditors to confirm it is valid. Now whose fault is that for introducing all the Accountancy Standards, IFRS’s, etcetera? The IASB (International Accounting Standards Board) is one such body whose members just happen to be former external auditors and partners at the Big 4 firms.  Some would say theres a conspiracy; I couldn’t possibly comment…

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Comments»

1. ITauditSecurity - September 28, 2011

Nope.

2. Audit Georgia - October 5, 2011

Grant Thornton Georgia is a team of experienced public accountants and auditors, specialist advisers in finance, business and management, as well as tax and legal advisers working at Tbilisi office.

Audit Monkey - October 5, 2011

Excellent. All you need to do is ensure your auditors are conversant with UK GAAP and IFRS, have a Visa, can speak Engerlish, and away you go!

3. Todd Johnson - January 27, 2015

The big four have huge marketing budgets and often sell “the dream” to students before they graduate. If that’s the case, then why is the leavers rate so high at big four firms? What’s the real story? What kind of managers do you have to deal with every day?

Our website will list a whole bunch of real stories from people currently working at EY, Deloitte, PwC and KPMG around the world.

We’ve already got a lot of submissions from employees from the U.S., Canada and the U.K. that we’re currently sifting through and making sure all names are replaced and the submissions are kept anonymous for the stories we decide to publish.

All profits from our website are donated in equal portions to the following charitable organizations:
* EY Foundation
* Deloitte Foundation
* PwC Charitable Foundation
* KPMG Foundation

Be sure to read the stories we’re publishing at http://www.therealbigfour.org


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