One of the most significant suggestions made by the Financial Reporting Council as part of its investigation into ways to break the stranglehold of the Big Four on major audits is that auditors should be forced to disclose their profits on audit work.
If implemented, it might just have a chance of achieving its aim, says Robert Kerr, managing partner of French Duncan, chartered accountants.
Current rules say accountants are only obliged to state revenues, but the FRC has made it clear it wants to make audit profit disclosure mandatory.
Kerr is entirely behind that intent. He said: "Such a move would enable clients to see for themselves just how much profits the big four accountancy firms make from their audit departments. These profits are possible partly because, in practice, the Big Four typically adopt a broad brush approach to auditing where work is designated to as junior a level of staff as practicable and the involvement of the audit partner is minimised.
"Indeed, in so far as most plcs are concerned, audits are generally regarded as little more than a legislative requirement. That is why they will typically look for external auditors to do what they have to do as quickly as possible and with the minimum of fuss and disruption. After all, plcs have their own internal audit divisions which are more than capable of fulfilling their own audit function."
Kerr believes this way of working contrasts sharply with the audit work undertaken by mid-tier firms where the audit teams are usually in daily dialogue with the finance directors of plc clients. He says there is a culture of plc finance directors insisting on appointing Big Four firms because they are regarded at boardroom level as a "safe pair of hands". And consequently the financial director faces less risk of criticism than if they appointed a lesser-known, mid-tier practice.
Kerr added: "The fly in the ointment of that argument, of course, is that they need only reflect upon the various major corporate frauds and scandals that have arisen over recent years to discover that in each and every case the audit was undertaken by a Big Four firm."
Other suggestions by the FRC include opening up the files of outgoing auditors to their replacements, requiring companies to provide investors with more information on the audit selection process, and allowing shareholders to vote on audit committee reports.
Kerr doubts those measures could really assist in dismantling the stranglehold that the Big Four have over audits. He said: "Few outgoing auditors, Big Four or otherwise, myself included, would welcome the suggestion that they should open up files to their replacements. Similarly, allowing shareholders to vote on audit committee reports is likely to be a complete waste of time.
"After all, shareholders already have an opportunity to vote on whether or not to reappoint auditors at the AGM. Besides, given that the main shareholders in plcs are typically institutions and pension funds, allowing shareholders to vote on audit committee reports would make little, if any, difference."
However, should auditors be forced to disclose their profits on audit work, it would have significant cost implications for mid-tier firms, adds Kerr.
"Production of such disclosure is unlikely to be straightforward, partly because their audit departments and partners will not always be devoted exclusively to audit work, making the assignation of costs far more complex than it is for the Big Four firms."
And then there is one final question, says Kerr: "If auditors are compelled to show the profits they make from audit work, who will audit the profits calculated by auditors?"
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