UK audit regulator dangers cementing the Massive 4’s oligopoly

The subsequent head of the UK accounting regulator will take over a extra skilled organisation than the “ramshackle home” inherited by Sir Jon Thompson in 2019. However a conundrum stays: can the watchdog drive up audit high quality concurrently rising competitors within the sector?

Beneath Thompson, who will go away this summer time after being appointed chair of the HS2 rail hyperlink, the Monetary Reporting Council has been swift with the stick. It has admonished auditors for poor work, meted out heftier fines and beefed up day-to-day supervision of the massive accounting teams.

Initially, Thompson’s workforce centered on the Massive 4 — Deloitte, EY, KPMG and PwC — which maintain an iron grip on the FTSE 350 audit market, accumulating 98 per cent of charges.

Not too long ago, the regulator has paid extra consideration to smaller companies. BDO and Mazars have been singled out for criticism in inspections. After a run of fines, Grant Thornton has decreased the variety of public curiosity entities (PIEs) — massive listed corporations and controlled banks or insurers — it audits.

If the audit market was as soon as a wild west, rife with cosy relationships and low requirements, some within the career really feel the regulatory pendulum has swung too far within the different path, doubtlessly discouraging smaller gamers from stepping up.

For companies like BDO and Mazars, tighter regulation makes their intention of auditing extra massive listed corporations expensive and painful forward of reforms that will require FTSE 350 corporations to have a part of their audits completed by a non-Massive 4 agency.

“The regulatory stress is turning into insufferable,” says a senior auditor at one mid-tier agency of the calls for from FRC supervisors.

The elevated regulatory burden means the FRC is “cementing the oligopoly” of the Massive 4, says a senior accomplice at one other agency, lamenting the sources required to reply to fixed requests from the watchdog.

The regulator’s gaze has additionally widened past the very largest mid-tier companies to smaller gamers. Of the 14 publicly introduced audit investigations launched by the FRC prior to now two years, 9 have been in opposition to companies outdoors the Massive 4, together with smaller “challengers” equivalent to Shipleys, MHA MacIntyre Hudson, Crowe and Saffery Champness.

Extra stringent regulation creates boundaries to entry for small companies that perform solely a handful of PIE audits, which are a magnet for stricter oversight than their different work. These embody spending on programs and consultants to hold out the work and investing time and sources to adjust to FRC inspections.

The companies additionally worry fines and reputational harm if issues go improper. Their considerations are well-founded provided that FRC inspections have discovered work by auditors outdoors the highest seven are of decrease high quality.

The Massive 4’s resolution to ditch smaller or riskier purchasers coupled with authorities plans to redesignate about 600 corporations as PIEs below long-awaited reforms, was anticipated to result in work cascading down in the direction of smaller accounting companies. But when smaller companies choose out, these corporations might want to discover auditors elsewhere.

“That useful resource has to return from these companies who’re . . . outdoors the Massive 4. It’s worthwhile to encourage extra into the market,” says Martin Muirhead, chair of the Affiliation of Practising Accountants, a bunch of midsized companies.

Prime 15 accounting companies Saffery Champness and Evelyn Companions (previously Tilney Smith & Williamson) weren’t among the many 30 non-public companies named on the FRC’s just lately launched register of companies authorised to hold out PIE audits.

Sarah Rapson, FRC deputy chief government and head of supervision, says the watchdog is keen to “assist”, together with by launching a “scalebox” initiative to teach smaller companies on what it expects of them.

Rapson insists there may be “not a commerce off” between rising audit high quality and enhancing competitors. Regulation shall be “proportionate” to companies’ measurement however she argues that audit high quality “is the one most necessary factor” and can in the end develop into a foundation for higher competitors.

Harder scrutiny of the auditors who log out corporations’ accounts was overdue after years of dangerous follow. However the FRC faces a tough balancing act. If it reaches for the stick too usually, its welcome push for prime requirements dangers squeezing smaller companies out of the market completely.

michael.odwyer@ft.com 
@_MODwyer