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Advisor Welcomes MPG Recommendations For UK Audit Market

by Robin Pilgrim,, London

17 October 2007

Tuesday's publication of the Financial Reporting Council (FRC) Market Participants' Group's (MPG) conclusions into improving competition and choice in the audit market have been welcomed by Grant Thornton UK as a sensible package of measures that will improve competition and choice over time.

The Market Participants Group was established in October 2006 to provide advice to the Financial Reporting Council on possible actions that market participants (i.e. companies, investors and audit firms) could take to mitigate the risks arising from the characteristics of the market for audit services to public interest entities in the United Kingdom.

In its report, the MPG made 15 final recommendations. These are intended to: increase the feasibility of investment in the supply of audit services to public interest entities by existing non-Big Four firms or new firms; reduce the perceived risks to directors of selecting a non-Big Four firm; improve the accountability of boards for their auditor selection decisions; improve choice from within the Big Four; reduce the risk of firms leaving the market without good reason; and reduce uncertainty and disruption costs in the event of a firm leaving the market.

"It is a package of measures that include helping the market to make informed choices in the selection of auditors in part through a better understanding of audit quality and greater transparency of the capabilities of individual firms," observed Michael Cleary, CEO, Grant Thornton UK. "They also include independent guidance to audit committees on considerations relevant to appointment and a review of the options to the present ownership structure of most firms. Over time, these measures will help create the right conditions to provide greater choice in the larger audit market place, which is at present dominated by just four firms."

Grant Thornton believes that the Financial Reporting Council has worked very effectively over the past two years to put the issue of audit competition and choice at the top of the industry agenda.

"I hope the FRC will continue to take the leadership role in promoting programmes which encourage competition and choice," Cleary commented.

He added that: "The full implementation of today's recommendations will go a long way to help open up what is clearly an overly concentrated market. This is however a long term development. Companies review their audit arrangements at varying intervals and generally, as the report indicates, there are relatively few changes in auditor appointments in any one year. However, provisions aimed at creating an environment which seeks to improve factual information available to the market and dispel inaccurate perceptions are to be welcomed."

According to Grant Thornton, the reasons for auditor concentration are multiple. They range from the limited understanding of audit quality and capabilities of a wider group of accounting organisations, to inaccurate perceptions and limited share owner engagement on auditor selection.

Cleary added: "We accept that a handful of the UK's largest companies through scale and very specialist resource needs are best served by a Big 4 firm, but this argument does not go beyond this group."

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