Plans to force firms to switch auditors don’t go far enough

Mark Kleinman
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BANKS, ratings agencies, now auditors: the firing line of financial sub-industries being dragged kicking and screaming into a post-crisis world continues to lengthen.

As soon as tomorrow, the Competition Commission will pave the way for an overhaul of the Big Four accountants with a proposal to enforce mandatory rotation of their major audit clients at least once a decade.

It is an overdue reform: the average FTSE 100 company has had the same auditor for almost half a century.

The Financial Reporting Council has done a limp job of addressing concerns about the oligopoly enjoyed by Deloitte, Ernst & Young, KPMG and PwC.

Yet the consequence of mandatory rotation may not be as profound as some hope. Those who argue that forcing FTSE companies to switch between other Big Four suppliers will do little to stimulate competition beyond that closed quartet have a point.

But there is a wider issue. Would PwC, for example, have been happy to approve the use of Barclays’ infamous off-balance sheet vehicle, Protium, if it had been on the verge of being replaced by one of its main rivals? Indeed, I understand that Antony Jenkins, Barclays’ chief executive, will probably use the arrival of a new finance director (replacing Chris Lucas, himself a former PwC partner) to review the bank’s relationship with the audit firm.

The inability of the Big Four to spot the looming crisis in 2007 and 2008 makes a strong case for even more frequent mandatory rotation, say every five years, in the banking sector.

The Competition Commission should go further.

Nobody doubts that Ian Davis, named last week as the next chairman of Rolls-Royce Holdings, is a man of integrity. But there is something about his appointment to one of the most illustrious posts in British business that is uncomfortable.

The issue is this: Davis is among the directors of BP responsible for setting the pay of boardroom colleagues including Iain Conn, the oil group’s head of refining and marketing.

Conn was, in turn, the non-executive director of Rolls-Royce responsible for leading the search for Sir Simon Robertson’s successor as chairman of the aerospace group.

Did Davis recuse himself from discussions about Conn’s pay once he became a candidate for the Rolls-Royce job? Did Conn hand over the search to another Rolls board member?

If either is the case, it should have been made clear in the statement announcing Davis’s appointment.

That is not to say that Davis will not make a fine chairman of Britain’s most important manufacturing company. His crisis management experience, honed after the Gulf of Mexico oil spill, should equip him well if a similar catastrophe were to emerge at Rolls-Royce.

But the episode has done nothing to assuage the widespread impression that FTSE 100 boardrooms remain a cosseted club where the back-scratching suits its members just a little too tidily.

Where has Sir Jeremy Heywood, the cabinet secretary and Britain’s most powerful civil servant, been for the last two years? Not reading or watching business news bulletins, clearly.

I’m told that at a recent meeting with senior bankers, including Bruce van Saun, finance director of Royal Bank of Scotland, Sir Jeremy professed himself to be oblivious to industry concerns about the eventual bill for mis-selling payment protection insurance and interest rate derivatives.

Given that the £12bn already set aside for redress by the four biggest banks could support 10 times that sum in lending to the real economy, it is a worrying gap in the mandarin’s knowledge.

Mark Kleinman is the City editor of Sky News @MarkKleinmanSky