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Is there enough choice in the Irish audit market or are joint audits needed? Back  
Drawing on Oxera’s consultancy report on ‘Competition and choice in the UK audit market’, Joe Carr examines whether or not there is enough choice in the Irish audit market. He concludes that the risks identified by the Oxera report apply equally in the Irish context, and ‘joint audits’ might be a solution to this problem.
Early last month the consultancy firm Oxera published its report ‘Competition and choice in the UK audit market’. The report, commissioned by the UK Department of Trade and Industry and the Financial Reporting Council, illustrates the impact of the concentration of auditors in the UK market.
Joe Carr

The report portrays a UK audit market that is dominated by the ‘Big Four’ audit firms. The statistics say a lot – all but one of the FTSE 100 are audited by the Big Four, 99 per cent of audit fees in the FTSE 350 are paid to the same four firms – but the comments of users tell us even more – the Big Four are widely perceived as better placed to provide services in addition to the audit, are considered to offer better insurance against catastrophe and reputational risk, and many believe that they have greater capacity when it comes to delivering audit services to corporate clients.

The Oxera report identifies some of the potential problems with this situation. Specifically, it suggests that the choice available to users is limited – even going so far as to that ‘a limited number of UK-listed companies, primarily in the financial services sector, have no effective choice of auditor in the short run’. It is easy to see why this is the case – potential for conflict of interest is high when there are only four participants in a defined market, and it is very easy to conceive of situations where three of the four might be proscribed from providing audit services to a particular company.

This situation is likely to be made even worse if one of the Big Four was to cease to participate in the market – for whatever reason. The report also notes that entry or expansion by mid-tier firms into the very large corporate sector is unlikely due to barriers to entry, suggesting that ‘the current market structure’ is likely to persist. This sounds like a high-risk version of carrying all of ones eggs in a single basket. The consequences of a catastrophe engulfing one of the Big Four will likely be measured in its impact on investor confidence and the functioning of the markets.

A quick glance at the companies listed on the Irish Stock Exchange shows that the majority are audited by the Big Four. Similarly, I would expect that the percentage of Sarbanes Oxley review, statutory reporting assignments and other assurance work carried out by the Big Four is the largest part of the total activity in these areas. Combine all of this work, which we might describe broadly as ‘audit and audit related’, with the very extensive accountancy services and taxation advisory work carried out by these firms and we paint a picture of a market that is dominated by four large players.

The risks identified by the Oxera report apply equally in the Irish context – limited choice, increased potential for conflict of interest and a possible threat to the integrity of the system if the profession was to encounter another shock along the lines of the Andersen failure. And, equally, it is incumbent on us as a profession to at least consider the implications of those risks.

In my view the most important of the issues identified by Oxera is the question of offering the consumer a credible choice. I believe that there is within the market a number of firms who can, and do in certain capacities, provide excellent service to the large corporate sector. The issue then is how does one address the perception in the Boardrooms that scale of operations and insurance cover outweigh all other considerations when choosing an auditor? One answer is, obviously, that those outside the Big Four have to differentiate themselves by developing the capacity to audit leading businesses in sectors where they have the skills.

Another way of addressing these risks may be joint audit. This concept was seriously considered as an option in this country a number of years ago – the First Report of the Committee of Public Accounts Inquiry into D.I.R.T. recommended that a joint audit regime be considered for the Banking industry. While the option has not been legislated for to date I believe that it does present a realistic means of dealing with the risks identified in the Oxera report.

A joint audit regime offers the client more choice and an opportunity to diversify risk. It will provide mid-tier firms with aspirations of working in the large corporate sector with an incentive to invest significantly in the delivery of audit services to those elements of the large corporate market where they possess sector expertise. One of the key arguments made in the past against the introduction of the joint audit model is that it may lead to increased administration for clients. I cannot see any logical reason why this should be the case. If any additional effort is required it will fall to the joint auditors to arrange their work in such a way as to insulate the client from inconvenience. Similarly, I do not believe that it will lead to increased costs for clients – in fact, there is an argument that the introduction of joint audit may lead to a reduction in cost to the client.
The Oxera report should not be ignored in this country. It points to a real challenge to the auditing profession as it engages with the large corporate sector. Suggestions like joint audit may not be a very palatable solution in some quarters, but I believe that we, as a profession, run the risk of ultimately failing our clients in the most fundamental way if we do not at least look for a meaningful way to address the current market imbalances.

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