Noting that the audit of the financial statements of large companies in the UK and internationally is dominated by an oligopoly and that any move from the Big Four to a Big Three would create an unacceptable degree of market concentration, a Parliamentary committee recommended measures to increase the ranks of the Big Four.
In 2010 the Big Four audited 99 of the FTSE 100 leading firms and around 240 of the next-biggest FTSE 250. In light of this level of concentration, the Committee urged the Government and regulators to promote living wills for Big Four auditors. These would lay out all the information the authorities would need to separate the good from the failing parts of an audit firm so that disruption to the financial system from a collapse would be minimized. By setting out an orderly process of dismantling, reasoned the Committee, living wills should also help ensure that no audit firm was regarded as too big to fail
One suggested way to enhance competition would be to introduce mandatory joint audit where each audit firm signs off the audit report and opinion. The Committee is not entirely convinced that this would deliver better accounts. It has only been applied in a few countries where the results do not amount to a resounding recommendation in its favor. But if it were promoted in the UK as a means to reduce market concentration, said the Committee, it should be on the basis that at least one joint auditor would be a non-Big Four firm
The very long tenure of auditors at large companies is evidence of the lack of competition and choice in the market for the provision of audit services. The Committee believes that a regular tender, with a non-Big Four auditor invited to participate, should promote greater competition to the benefit of both cost and quality. The Committee recommended that FTSE 350 companies carry out a mandatory tender of their audit contract every five years. In addition, the audit committee should be required to include detailed reasons for their choice of auditors in their report to shareholders.
Measures relying on shareholder engagement to help lessen audit market concentration are unlikely to be effective, the Committee concluded, adding that most shareholders appear to care little about a company's choice of auditor, and it seems improbable that this apathy will soon be remedied. That said, the Committee did urge audit committees to hold discussions with principal shareholders every five years;
Also, Mazars suggested investor scrutiny might be strengthened by forming independent shareholder panels to choose the auditors. BDO recommended direct shareholder representation throughout the appointment and review process rather than only at the end
Since the leading second-tier audit firms told the Committee that their scope for growth is not constrained by any problems of access to capital, for example BDO and Grant Thornton, the largest non-Big Four auditors, say they have no need for greater access to capital to expand, the Committee saw no immediate grounds to change the law to lift limits on shareholdings by non-auditors in audit firms.
The Committee strongly supports the development of separate board risk committees, which will require specialist skills and external advice. This advice should not be provided by the auditor of the company’s financial statements, said the Committee, since providing it could open opportunities for non-Big Four firms to enter the large company market.