The Big Four look set to retain their stranglehold on large listed company audit even though over half of client companies do not rank their current auditor as their first choice
Despite a preference for Big Four auditors, there are growing opportunities for mid-tier firms, particularly BDO and Grant Thornton, according to a study by Source Global Research.
The research found that although over two-thirds (68%) of audit clients still rank a Big Four firm – PwC, Deloitte, EY and KPMG – as their first-choice external auditor, over half (58%) do not name their current auditor as their first choice.
Over a fifth (22%) of audit clients would choose either BDO or Grant Thornton, confirming that these two firms are the leading choices outside of the Big Four and are the mid-tier firms best placed to capture some market share.
The consultancy surveyed CEOs, CFOs and senior finance executives from large organisations in the US (66%) and UK (34%), all of whom have been responsible for selecting external auditors or have worked with external auditors during the audit process.
It identified two key factors benefiting the incumbent auditor and restricting more supplier churn in the audit market.
The first is knowledge of the sector and the extent to which the auditor knows and understands the client’s business. With the current auditor already holding a lot of this specific knowledge, it is difficult for an alternative firm to convince prospects that it can offer something extra in these areas.
Secondly, the report found evidence that complex stakeholder landscapes create inertia. This benefits the incumbent as audit committees need to be won over and it may be hard to convince committee members to change auditors, especially where there are no obvious problems with the current relationship. For listed companies, shareholders need to approve a change in auditor as well, and want to hear a strong argument to explain why a change is necessary.
Martin White, a senior analyst at Source Global Research, said: ‘It takes a lot of political capital for decision makers in companies to push through a change of auditor, and that may act as a block even when there is some dissatisfaction with the existing auditor.
‘Our research also shows that there could be an opportunity for BDO and Grant Thornton to pick up much more work if clients have a positive experience of working with BDO or Grant Thornton for advisory work, or through joint audits and audit firm rotation. This could mean that more clients may trust them to provide a high-quality audit and lean towards them as their first-choice auditor.’
Despite the recent public focus on declining quality of audits, the research found clients think very highly of the quality of audit work, with 80% rating it as either ‘high’ or ‘very high’ quality.
The Source report also revealed that audit clients do not appear overly concerned by potential conflicts of interest. The majority of respondents only think auditors should raise awareness of other services during the audit or six months before retendering. Only 2% of clients think an audit firm should never talk about other services it offers.
White said: ‘With mandatory audit rotation looming, the firm that can successfully raise awareness of its other services stands to gain not just revenues, but perhaps even deepened relationships with its clients.
‘Ultimately though, we feel that innovative uses of technology may turn out to be a driver of change by allowing firms to differentiate themselves and demonstrate the possible improvements a new auditor could bring.’