Bad News For Competition – Grant Thornton Stops Competing for Big Audit Contracts

Grant Thornton, the fifth-largest accounting and auditing firm in the UK, announced last week that it will no longer compete for auditing work from FTSE 350 firms - the largest quoted businesses in the country. The firm is the biggest of the second-tier accountants in Britain with 185 partners, 4,500 staff and £500 million revenues annually. It is part of the global network Grant Thornton International, with offices in 130 countries, and traces its UK roots to 1904, when Thornton, Webb & Co was founded.

The partners are sick of spending huge amounts of money – up to £300K a time, according to the report in the Times, and yet failing to win accounts such as Marks & Spencer, constantly finishing behind one of the “big four” audit firms (KPMG, Deloitte, EY and PWC). Grant Thornton does already have a handful (five) of the FTSE 350 as clients, but will look at those on a case-by-case basis when the time comes for renewal.

The EU and UK governments have been pushing in recent years for more competition in the audit sector, for instance by introducing legislation that means firms must go to market at least every ten years and compete their audit business. But it seems that while this has perhaps introduced a little more supplier switching, it is not really helping “new” competitors break into that magic circle.

That is despite recent issues that suggest the big firms are far from perfect. The collapse of Carillion raised questions about their external audit, and the even more recent disintegration of the Conviviality business (the retail and distribution firm behind the Bargain Booze and Wine Rack chains) is even more shocking. The firm’s issues include an “arithmetic error” in the numbers and “not realising there was a £30 million tax payment coming up”. There will be questions for their auditors, KPMG, no doubt.

Anyway, back to Grant Thornton. There is no doubt that if we looked at this from the perspective of the whole market, procurement professionals would like to see more competition and firms able to break into the top tier. That’s fine from a market perspective; the problem is that when each individual buyer looks at their own decision, no-one wants it to be their business that takes the leap and “risks” using a smaller firm.

It is one of those cases where the ‘wider good’ runs up against selfish but understandable self-interest, and there are no easy answers to this. We suspect CFOs of large firms are a pretty cautious and risk-averse group, so need a lot of persuading before they take what they perceive to be a risky step. We wonder whether any CPO in these bigger firms has really pushed to make the leap, but if they have, obviously they were over-ruled!

It seems that the public sector however is more open to Grant Thornton, and it will continue to pitch to public sector clients of all sizes, and smaller listed companies, as well as offering advisory services to the bigger firms. But overall this reluctance of big firms to look beyond the save choices in this spend area is bad news in terms of seeing a dynamic and competitive market for audit services.

Voices (2)

  1. RJ:

    A thoughtful article, Peter, which really highlights the challenge faced within the audit market and some of the flaws in the logic applied by the EU and Competition Commission when they introduced the much overdue forced competition to the appointment of auditors.
    Having been involved in a reasonable number of FTSE350 audit tenders over the last few years, the challenge faced by the second tier of providers in breaking into this segment of the market should not be underestimated. Outside of the truly global behemoths, BDO, GT and, to a lesser extend, Baker Tilly ought to be able to present a credible case for their inclusion in a longlist of potential providers. In my experience, too, most Boards and Audit Committees are reasonably open (although maybe sceptical) to seeing what they may have to offer. This is especially true when, in many instances, the AC is faced with a situation where, for example, one of the Big 4 has to rotate off the account, another is conflicted by their work on internal audit, a third is the leading tax adviser (earning more than they would for the audit) and the fourth is relatively unknown having been sidelined after a poor piece of work several years ago.
    Unfortunately in responding to tenders, the second tier has often failed to demonstrate sufficient differentiation in their approach, creativity in their proposals (e.g. through a deep knowledge of how technology can improve quality and drive out costs), strength in depth or even lower cost in many instances. When this is added to the inherent fear of change highlighted in the article above, it’s very understandable that firms will go for a perceived safe option (even if it’s effectively sometimes a two, or even one, horse race) and also that ultimately the second tier would realise that the vast costs of repeatedly bidding as a stalking horse would not be worth it.

  2. Trevor Black:

    There are certainly wider issues than what is described here. Following the demise of Enron in 2001 does anyone remember Arthur Anderson? There followed the usual “lessons learnt” speeches and questions over how these big accountancy organisations can get things so wrong and getting well paid for it. The Carillion debacle is more of the same. It is one big racket and I suspect that if any of these so called independent audit organisations presented a negative report they no doubt would not win the contract next year. There is a fundamental flaw in this approach that could be resolved by auditing organisations being contracted by independent third party organisations. This would considerably reduce this corrupt practice and restore public confidence.

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