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Re-allocating the Big Audit Market in the U.K.—Or Perhaps Not

Regulators and politicians in the United Kingdom may well disrupt the Big Audit model—judging from inquiries launched recently by the Financial Reporting Council and the Competition and Markets Authority. The series that I began on Re:Balance on Sept. 25 and Oct. 8 started to address the misguided nature of the purported “remedies.” It is making for pretty heavy going, so with thanks for the opportunity to guest for Going Concern, this lightens up a bit.

Grave as are the U.K. threats to break up the Big 4, strip them down to “audit only,” or impose government appointment of large-company auditors, it would take a comedy script writer to capture the folly by which, it is suggested, the Big 4 would “voluntarily” reduce their dominant market share of the FTSE 350 from 97% to 80%.

The head of assurance for Grant Thornton in the U.K. offered on Sept. 14 that a nationalized appointment authority, which “would take the buying decision from the company … could split audits, say 50 for the Big Four and 50 for the non-Big Four.”

Seriously intended or not, the idea comes oddly from those with expertise in the assessment and comprehension of quantitative information. What comes to mind instead is the stateroom scene in “Night at the Opera.”

To expand and explain—by 2017 revenue, the 10 large firms in the U.K. array as shown below (in £ millions). Of their £13 billion total, the Big 4 garnered more than £11 billion, or 86%. The trailing six firms divided the remaining 14%.

PwC                          3,598
Deloitte                  3,380
EY                               2,350
KPMG                      2,172
Grant Thornton      500
BDO                               429
RSM                               320
Moore Stephens    181
Mazars                         173
PKF                                130

If the notion of shifting fully half of the FTSE 100 audits were apportioned by firm revenue, Grants would take 15, BDO 12, RSM nine, and each of the others four or five.

Collectively, how ready and capable would they be? BDO presently has only one such engagement—Randgold Resources Ltd, actually on the bubble at No. 101—and that one is likely to go away with the Sept. 25 announcement that the company is to be acquired by Barrick Gold Corp, an audit client of PwC in Toronto.

Grants itself once had a FTSE 100 client, until the stock price collapse of Sports Direct dropped its ranking to No. 181. And in any event, that job is to move with the upcoming displacement of Grants thanks to the U.K.’s mandatory tender and replacement rules. None of the other midsize firms audits a FTSE 100 company.

As graphically displayed here on Sept. 25, the impact of scale is critical. No number of hours at the controls of a single-engine airplane can qualify a pilot, however skilled, to command a wide-body jet—much less a helicopter or a space shuttle or a stealth drone.

No less, and without a whisper as to the relative work quality up and down the table, the requirement of experience at the Big 4 level in performing large-company audits with global footprints and necessary industry expertise is compelling.

So despite the reams of paperwork that will be generated through the inquiries of the U.K. regulators, it remains a solid certainty that nothing like the suggested 50/50 re-allocation of the FTSE 100 will ever happen.

Sooner the proponents eventually “shrug and concede defeat,” sooner the discussion can move to steps of possible achievability and beneficial effect.

For more on that subject, please stay tuned.

Jim Peterson, a 19-year veteran of the in-house legal group of Arthur Andersen, writes about the profession on his blog, Re:Balance, and is the author of “Count Down: The Past, Present and Uncertain Future of the Big Four Accounting Firms.”