Jeremy Newman: Listen to investors for a thriving audit market

A study of the investment community makes the case for greater competition in the audit market more compelling than ever, says Jeremy Newman.

Jeremy Newman.

As the debate around competition and choice in the UK audit market has continued to escalate, I've become acutely aware that the accountancy industry has a tendency to look at issues from the perspective of the finance directors and audit committees that appoint us. Worse still, we can sometimes have a habit of seeing the world through our own, sometimes narrow, vision. That means that the view of the investor is all too often overlooked. In essence, we largely fail to take into consideration the perspectives of the owners of the UK's biggest companies.

I firmly believe that the views of investors are crucial to this debate. That's why BDO Stoy Hayward has sought to redress the balance by commissioning a study of the investment community to delve into the issues at stake from its perspective. The findings are illuminating and make the case for greater competition more compelling than ever.

Five years on from the collapse of Andersen, trust in audit quality has been eroded by Enron, WorldCom et al, with six out of 10 investors and analysts admitting to questioning the reliability of audited information as a direct result of doubts raised by accounting scandals.

Decline in trust

Worryingly, this decline in trust is being exacerbated by concern over the impact of the dominance of the Big Four accountancy firms in the UK audit marketplace.

A quarter of all respondents claimed that lack of competition could be risking audit quality and breeding complacency among those firms with a stranglehold on the market. At the extreme end, 5% of respondents even said they feared cartel arrangements among Big Four firms as a result.

The evidence suggests that the Financial Reporting Council (FRC) has a golden opportunity to restore trust in audit quality by creating the necessary conditions to increase competition and choice within the market. It is to be hoped that proposals are not watered down further, and that they go far enough. That means making brave decisions that may be unpopular in some quarters.

But what does the investment community really think about opening the market up to non-Big Four firms? It is gratifying for firms such as my own to see that half of those polled gave firms outside the Big Four a resounding vote of confidence and said they would have no concerns if a listed company switched to a non-Big Four auditor.

However, four out of 10 said they would have concerns, and most alarmingly, such a switch would make one third of investors and analysts consider reviewing their investment decisions and advice. Yet, when asked what they considered to be the shortcomings of a non-Big Four firm, over a quarter were unable to name a drawback at all. In short, 40% would be worried by a change to a non-Big Four auditor, but they can't say why.

Institutional prejudice

It is no secret that I believe underlying institutionalised prejudice must be tackled if the market is to change, and these figures are hard evidence that prejudice built on flimsy foundations is a key factor in preventing greater competition and choice in the FTSE 350 audit market.

We have said for some time that firms like BDO Stoy Hayward have the capability, expertise and international reach to service all but a small handful of companies, and this research indicates that only a minority of the investment community would dispute this.

But how do we address this perception gap? The FRC's plans to publish Audit Inspection Unit reports on individual audit firms is undoubtedly a step in the right direction, with nine out of 10 investors and analysts supporting the move. However, the job is far from done. It is vital that the public reports contain sufficient detail to be of real value to investors and other stakeholders. It is also important that they report on the strengths of the audit firms, as well as raising any concerns, if we are to fully restore confidence in the audit process.

Like many others, I await the FRC's final recommendations with a mixture of curiosity and trepidation. Let's hope this golden opportunity to address the challenges facing our industry is not squandered.

Jeremy Newman is managing partner of BDO Stoy Hayward.

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