Competition in the Audit Market – How Procurement Could Help

Here’s something the procurement profession could do that would have benefits to the UK economy, to governance of quoted companies, to the health of a key supply market, and all at no cost to their own organisations – in fact it would almost certainly save money too.

The dominance of the big four audit firms (KPMG, EY, Deloitte, PWC) has been commented on many times, and has come into sharp focus after criticism of the large firms’ performance in cases such as Carillion and BHS. Politicians, clients and regulators all say that they would like to see more competition in the market, which they believe would stimulate better performance form the big players.

Last week, the Times reported that Euan Stirling, global head of stewardship at Standard Life Aberdeen, the huge investment firm, said that he was concerned by the concentration of the audit market.  “We see evidence among the accounting firms of commercial interests being put ahead of professional judgment and that causes us concern,” he said, which is a pretty strong comment when you think about it.

But the second-tier firms find it very hard to win business – only one of the top 100 FTSE firms is audited by a smaller firm.  And in March, Grant Thornton, probably the number 5 firm in the market said this. “… we have taken the strategic decision to move away from tendering for statutory audit work in the FTSE 350, until we see a shift in the competitive landscape that would level the playing field for competing in this market”.

Sacha Romanovitch, Grant Thornton CEO told the FT that there “does not seem to be market appetite to change’ and that each tender cost the firm some £300K and routinely resulted in “a glorious second place!”

So this is a challenge for procurement people. We’re not suggesting that you should all immediately switch out of the big 4 tomorrow, but when you next run a tender for audit services,

  1. Make the process manageable and less costly so that a range of firms can bid without breaking the bank. There is no reason really why this should be an incredibly costly process – let’s face it, much of the auditing work is pretty commoditised these days, and all the firms offer broadly similar approaches and services. There is no need for a super-complex 500 page tender document and six-month-long process.
  2. Be open to change. Don’t make the evaluation criterion so skewed towards the giant firms that no one else has a chance (“please give five references that must be FTSE 100 firms who are current clients …”). Look for innovation, look for good personal fit between the senior people in the firm and your CFO, but don’t make the process one which only four firms could possibly win.

It also strikes me that this must be ripe for a bit of information sharing. Why can’t we have a central repository of information about the audit firms, with accreditations, all the compliance data, perhaps some client references, service standards and so on, then whenever a client goes to  market they could just access this, do a very short tender document based on a few more specific questions, and then an  interview?

There must be a suitable solution provider – software firm or consultancy – who could set that up? Save everyone a lot of time and money, and maybe get Grant Thornton thinking again about re-entering that market, and generally stimulating a bit more healthy competition.

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Voices (2)

  1. Trevor Black:

    For all those with short memories you should recall that following the collapse of Enron (16 years ago) this followed a positive audit report from the auditors Arthur Anderson. They also collapsed as their actions placed the whole audit industry into disrepute. To support the point I am making, in June the Financial Reporting Council (FRC) handed a £10 million fine to PwC for its 2014 audit of BHS, which was then sold by Sir Philip Greens, Taveta Group for £1. The reality is that these audit organisations are aware that negative reports wipe millions of the share value and it is not in their interests to publish a negative report. Why should turkeys vote for Christmas? Irrespective of the role of procurement the problem can only be resolved by auditors being appointed by third parties and that would generate confidence into a system that currently is not only corrupt but not fit for purpose.

  2. Dan:

    The Big 4 seem to treat audit services simply as a way of getting their feet under the table in order to sell higher-margin consultancy services, and also seem to be willing to undermine those audit services in order to cozy up to the clients to make themselves more attractive as consultants. Maybe one way to go would be to prohibit the auditor from providing other services so as to minimise this conflict of interests, in which case the Big 4 would simply ‘self-deselect’ themselves?

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