Is the UK about to turn against the Big 4?

This isn’t the first time the UK has considered making changes to the audit market

The UK government is considering changes to the UK audit market in light of the Big 4's dominance. At the end of March, Grant Thornton opted not to bid against the Big 4 for auditing contracts of FTSE 350 companies, heightening calls for a shake-up.

The concern is that the Big 4 have an unfair advantage in the auditing market when it comes to the biggest contracts and that this may affect audit quality. Together, Deloitte, EY, KPMG and PwC serve 97% of the top-end market.

UK Business Secretary Greg Clark has raised these concerns with MPs and the spotlight is on how to ensure the Financial Reporting Council (FRC) can do its job as effectively as possible in support of British business. But any sudden change in regulation will send ripples throughout the market.

The FRC told International Tax Review: "We have written to the CMA [Competition and Markets Authority] asking them to open a new investigation into competition in the statutory audit market. We wouldn't want to prejudge the outcome of such an inquiry."

ITR contacted the Big 4 firms to get their perspective.

Kevin Ellis, chairman and senior partner of PwC's UK & Middle East Alliance, said he would like to see more firms in the market for the biggest audit contracts.

"We'd welcome more players in the large company audit market to boost choice and are open to ideas about how to achieve this," Ellis said. "This is a market issue, driven by the complexity of large multinational clients which require significant size, scale and expertise in their auditor."

Stephen Griggs, managing partner for audit at Deloitte UK, told ITR: "While the market for large, public interest entity audits is undoubtedly concentrated around the Big 4, it is fiercely competitive and we do not believe the sector needs another competition investigation. The CMA's previous investigation was a rigorous process and only concluded in 2014."

"We support an independent review of the role and responsibilities of auditors with input from investors, regulators, standard setters, auditors and especially the wider public," Griggs said. "It needs to be forward-looking."

EY declined to comment and KPMG's vice chair was unavailable at the time of writing.

"We recognise that choice is limited – ideally there would be more than four big firms," Griggs said. "We would support measures that encourage other firms to succeed in entering the large public interest entity market."

Grant Thornton may be the fifth biggest firm, but it still felt it had to withdraw its bid to compete with the Big 4 for the FTSE 350 auditing contracts. Instead, Grant Thornton is opting to focus on areas of the market where it believes it has more chance to succeed. But this decision has inevitably raised the question of how to make the market more competitive.

"If you look at the auditing market as a whole, there is a reasonable amount of competition in certain sections of it – such as public auditing contracts," Sue Almond, head of assurance at Grant Thornton, told ITR. "It's when you get to the top end of the market, where you find almost all of the market is audited by just four firms."

The firm has six FTSE 350 clients, including Interserve, Sports Direct, Witan Investment Trust, Woodford Patient Capital Trust and JD Wetherspoon, all of which it will continue to serve. But it also has its eyes set on the horizon for new opportunities.

"When we talk about the lack of competition in the auditing market, we're talking about a very specific part of the market," Almond said. "We just won a very substantial role in the public sector and we have great representation on the [alternative investment market]."

The FRC and the EU have put into place measures to induce greater competition. For example, the FRC stipulates that companies have to put their audits out to tender, whereas the EU has made audit firm rotation mandatory. However, some feel that these measures have not had the desired effects.

"What's happened is we've seen an increase in concentration among the FTSE 350 rather than any change," Almond said. "Changes have simply been between the Big 4. The regulations have led to slightly more concentration than there has been in the past."

The global market for auditing is vast and the biggest companies require large firms to carry out the work they need. This means the market may have an inbuilt need for fewer and better options, as opposed to more variety and choice.

So firm rotation may not guarantee more competition because it doesn't lower the barriers for new firms to break into the market, but it has had positive effects in other ways.

"Mandatory firm rotation has increased the focus on audit quality and driven innovation, but not increased choice in the listed space," Ellis said. "Ways need to be found to help firms overcome the natural barriers to entry, such as the significant investment and resource required and increased auditor liability."

Others are more sceptical. Tony Bromell, head of integrity and markets at the Institute of Chartered Accountants in England and Wales (ICAEW), stresses it is still early days to judge mandatory rotation.

"It could be five or six years before we can see the impact [of mandatory firm rotation]," Bromell told ITR. "There has been more tendering in the UK, but anecdotally the contracts are mostly going around in circles, from say KPMG to Deloitte, from Deloitte to EY, from EY to PwC and back again."

Many tax advisers would support an independent review of the regulations, provided it took into account the interests of stakeholders and the right questions were asked. The same is true of support for new regulations.