Choice of Audit Firms Market Driven; No Mandated Big Five

There should be no regulatory intervention to create a Big Five audit firm. That was the tenor of a UK audit oversight group’s recommendation that increasing the choice of audit firms should be driven by market solutions, not by regulation. This position received the support of a broad industry consensus. Comments to the report by the Market Participants Group of the Financial Reporting Council, which oversees audits of public company financial statements, expressed the belief that market-based solutions will be more enduring than shorter-term regulatory measures.

In the wake of the implosion of Arthur Andersen, a number of groups are examining the issue of auditor choice, including the European Commission and the US Paulson Committee. A recent survey indicated that global institutional investors would welcome greater auditor choice.

One main objective of the FRC report is to reduce the perceived risks to investors of selecting a non-Big Four audit firm to audit the company’s financial statements, as well as to improve the accountability of boards for their auditor selection. Another important objective is to reduce the risk of audit firms leaving the market without good reason and to reduce disruption costs when a firm leaves the audit market.

The Institute of Chartered Accountants in England and Wales believes that market-based actions are the most effective means to achieve an impact. As such actions tend to involve information dissemination, persuasion and education, they may not have an immediate effect. They do however, tend to be more effective since, once accepted, they work with the market and avoid the unintended consequences that often follow from regulation.

The market group recommended that the FRC provide guidance on a company’s use of joint audits in which more than one audit firm network works on the audit. The Institute said there may be circumstances where audit quality would not be harmed by the use of auditors from more than one network.

But PricewaterhouseCoopers said that it would generally by unwilling to be the group auditor where its network firms were not also auditors of all or substantially all of the group. There are good reasons why large audit firms developed global networks, said PwC, and good reasons why companies employ a single network as worldwide auditor.

KPMG was concerned that the use of more than one audit network firm would have an adverse impact on audit quality. It is important for the parent company auditor to control the work performed by the auditors of the company’s subsidiaries, emphasized KPMG, and this is enhanced when all the firms involved in the audit use a common methodology. KPMG cited Parmalat as an example of what can go wrong when more than one audit firm is involved. Deloitte said that, in this area, nothing must be done that could damage audit quality.