FRC Gauges Support For Increased Audit Choice In The UK

by Robin Pilgrim, LawAndTax-News.com, London

15 September 2006

The UK's Financial Reporting Council (FRC) on Friday revealed that concerns over the dominance of the 'Big Four' accounting firms in the UK audit market are widespread.

The FRC last week published briefing papers for its second stakeholder meeting on 'Choice in the UK Audit Market', which will be held on 18 September.

The Council explained that:

"The Study looked at the characteristics of the UK audit market. It found that as result of the current competitive environment most large companies are perceived to have a choice of a maximum of four audit firms."

"In many cases the effective choice is perceived to be less than four firms because, for example, one or more firms might be ineligible for appointment as auditor due to auditor independence rules or due to a company’s own policies and procedures. In a small minority of cases, particularly in the financial services sector, companies may have no effective choice of auditor in the short term."

"If one of the Big Four firms was to leave the market, a few large companies would be unable to find an auditor with appropriate capabilities causing uncertainty for companies and investors and a risk of disruption to the markets, at least in the short term."

The forthcoming meeting will consider responses to the FRC’s Discussion Paper on Choice in the UK Audit Market and six tentative propositions about which the FRC will seek to test the extent of agreement amongst stakeholders. These propositions are as follows:

1) There would be significant risks to the availability and quality of audits if one of the Big Four firms was to leave the market.

2) These risks could be mitigated if there was:

• Increased choice of auditor for public interest entities
• Reduced risk of an existing firm leaving the market without good reason
• Reduced costs of uncertainty and disruption in the event of a firm leaving the market.

3) No single measure can address all of the risks identified but a considerable number of possible steps have been suggested by stakeholders.

4) Further work is now needed to develop and fully assess the range of possible steps to mitigate the risks identified.

5) In developing and assessing possible steps, the priority should be on those steps that can be taken by market participants. Any regulatory actions need to be subject to a thorough Regulatory Impact Assessment.

6) Debate on these propositions within the UK will make a useful contribution to the international debate on these risks.

FRC Chief Executive, Paul Boyle announced that:

“The responses to our Discussion Paper indicate that our stakeholders agree that choice in the UK audit market is an important issue. We are seeking to reach broadly-supported conclusions from this stage of the debate and agree on the next steps. We are looking forward to hearing the views of stakeholders at our public meeting on 18 September.”

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