Audit Reform - The Value of Balanced Debate

It has not been a good month for the 'Big 4'. In the UK, the Office of Fair Trading has referred the audit market to the Competition Commission and in Europe, Internal Markets Commissioner Michel Barnier has floated proposals that would restrict the market share of the Big 4 by introducing a raft of new legislation

It has not been a good month for the 'Big 4'. In the UK, the Office of Fair Trading has referred the audit market to the Competition Commission and in Europe, Internal Markets Commissioner Michel Barnier has floated proposals that would restrict the market share of the Big 4 by introducing a raft of new legislation.

The reaction of the profession - both Big 4 and non-Big 4 alike - has been rapid and fairly predictable.  The Big 4 have mobilised significant resources to combat the proposals.  One of the Big 4, it is reported, now has 60 staff members working full-time to lobby against the proposals.  Others will not be far behind.  And many mid-sized firms outside the Big 4 are working hard to counter this lobbying, arguing that Commissioner Barnier's proposals are exactly what the profession needs.

Many believe that the profession has not covered itself with glory over the last few years. Some of the criticism that the large firms face - and few will forget Commissioner Barnier's description of the Big 4 as "the dogs that did not bark" in the run up to the present financial crisis -  may be fair, but some is misplaced and demonstrates a lack of understanding of the role of the auditor.

Similarly, whilst some mid-sized firms undoubtedly have the resources and competence to take on additional public company work, others may not.  The investment required to broaden the extent of an audit firm's capability is both significant and long term.  And whether it is best achieved by legislation is questionnable.

As with so many arguments that I have put forward about the accounting profession recently, we should be driven by what is in the best interests of the clients.  Of course greater competition means greater choice - and greater choice is almost bound to benefit not only clients, but also the typical high quality firm that makes up the membership of MSI Global Alliance.

But greater choice is only worthwhile if clients really understand the market and the available options - and if they are not restricted, for example, by banking covenants requiring a Big 4 auditor when, by looking at all other criteria, a smaller firm might be more appropriate.

Clients will only improve their knowledge of the market if the current debate is balanced, fair and open.  Commissioner Barnier's proposals may appear to be anti Big 4 - and there are certainly practical issues in terms of their implementation - but they are not all 'wrong' or 'bad'.  Nor is blatant market intervention to support mid-tier firms necessarily the right way to promote competition.

A balanced debate leading to some form of compromise may well do more to restore stakeholder faith in the auditing profession than one side claiming victory over the other.  'Managed evolution' often leads to better results than a rushed revolution.

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