AN influential House of Lords Committee is set to issue a blistering attack on the “big four” auditors today after an eight-month inquiry into the competitiveness of the audit industry.
The Economic Affairs Committee, which is chaired by Conservative Lord John MacGregor, is understood to want drastic action to deal with a potential “systemic risk” created by the dominance of the “big four” – Deloitte, PricewaterhouseCoopers (PwC), Ernst & Young (E&Y) and KPMG.
A likely outcome from the Lords’ inquiry is a full-scale probe into the competitiveness of auditing by the Office of Fair Trading (OFT), which could recommend an overhaul of the industry.
The OFT is already investigating the effect of “big four clauses” in loan agreements – whereby a lender requires that a firm use one of the big four auditors to check its accounts – meaning that it would simply have to widen the scope of its current inquiry.
The decision on an industry-wide probe lies with business secretary Vince Cable, who told City A.M. yesterday that he is withholding judgement until he reads the full report.
During their inquiry, the lords were told that the dominance of the big four contributed to the financial crisis and that audit standards are slipping.
The big four currently audit 99 of the firms in the FTSE 100. The lords committee heard evidence that the UK’s biggest firms change their auditor on average only every 48 years, although some say this figure is out of date. The exception is Randgold Resources, which uses BDO for auditing services.
BDO partner James Roberts said: “A lot of FTSE 100 financial directors and non-executives are alumni of the big four, so it gets very self-reinforcing.”
But Pauline Wallace, a senior audit partner at PwC, said that while she supports the current OFT inquiry, a broader investigation is unnecessary: “It’s a fiercely competitive market… There’s a question about how many is enough. The four firms absolutely do compete at FTSE 100 level.”
Deloitte, E&Y and KPMG declined to comment.