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Competition and Choice in the Audit Market

One of the topics discussed during the International Tax & European Conference, recently held in Helsinki, Finland, by the Russell Bedford International accounting network was the debate about competition and choice in the audit market. 

Dr. Martin Manuzi from the European Office of the Institute of Chartered Accountants in England and Wales (ICAEW) updated the audience inter alia regarding recent developments in this area and presented the ICAEW’s comments submitted in March 2009 in response to European Commission consultation paper on Control Structures in Audit Firms and their Consequences on the Audit Market.

The consultation paper referred to above was launched by the European Commission in November 2008 inviting the public’s comments on control structures in audit firms. The issuing of the consultation paper followed an independent study, carried out for the European Commission and published in October 2007, on the ownership rules applying to audit firms (which in most cases demand majority ownership by auditors) and their consequences for audit market concentration. The main conclusions of this study were:

• The audit market for major listed companies is dominated by the Big 4 audit firms. In order to expand their activities and enter the international audit market, the smaller audit firms would need to make significant investments over many years;

• The analysis indicates that an audit firm owned by external investors, instead of auditors, might more easily take the decision to expand into the market for large audits and therefore assist in developing competition in the audit market;

• There are several potential barriers which play an important role in preventing entry to the large audits market, such as restrictions on access to capital, reputation, the need for international coverage, international management structures, and liability risk;

• From the regulatory point of view, existing ownership structures have been justified by the necessity to protect independence of audit firms. However, the analysis of the decision-making processes in large audit firms indicates that alternative ownership structures are unlikely to impair auditor independence in practice. Specific conflicts of interest could be dealt with through the establishment of appropriate safeguards.

Following the publication of the above-mentioned study, a public consultation was initiated to examine possible ways to stimulate the emergence of new players in the international audit market and eventually to encourage competition with the Big 4 firms in the large audits market. The consultation paper introduced several matters to the public and invited comments on such questions as: the need for opening up the market for the audit of international companies in order to have more European wide audit service providers compared to the existing situation; the need for a more integrated audit market; the sufficiency of the current number and structures of audit firm networks; whether access to financial capital is a key factor to accelerate further integration of audit firms and the emergence of new players; and the possible negative influence of alternative ownership models on auditors’ independence and the need for additional safeguards at European level to protect independence.

The participants in the Russell Bedford conference generally agreed that greater choice is desirable. At the same time they recognised that the size and capacity of audit firms should be in line with the size and complexity of their audit clients. There is no doubt that the largest international and/or very specialised companies must be audited by a firm with an appropriate level of resources and specific professional knowledge, and normally this is available only to a limited number of audit firms. Nevertheless, a wide range of medium sized and even some large companies might be audited by smaller firms and therefore this part of the audit services market should be more competitive; today in many cases this market is also dominated by the Big 4 firms.

The participants also discussed the potential impact of the possibility of an unintended withdrawal of one of the Big 4, which would lead to a further decrease in choice and have a negative impact on capital markets.  Developing conditions to allow more effective competition by smaller firms and their growth might assist in preventing a further decrease in choice in the case of such an unintended withdrawal.


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