The Big Four firms, Deloitte, Ernst & Young, KPMG and PwC, have long held the lion's share of the professional services market. Together, this quartet of multinational conglomerates audit all but one of the FTSE 100 companies, and they dominate the industry in providing assistance to clients worldwide, in areas from risk management and tax services to financial advice and business consulting.
All shook up
What's the problem, we hear you ask? The Big Four are accused of holding a market hegemony that stifles any competition from smaller firms which, regulators argue, drives prices up and pushes quality down. Now, in an effort to tackle the oligopoly, Europe's internal market commissioner, Michel Barnier, has drafted a series of checks and balances that could overhaul the industry if they pass into EU law next year.
The most controversial proposal threatens to break up the Big Four by banning audit firms from providing non-audit services, in order to prevent conflicts of interest and to make auditing more thorough. This would shake the fundamental business model of audit firms, many of which also offer an extensive menu of consulting and advisory services.
In the UK, the Auditing Practices Board already restricts accounting firms from offering advisory services to their audit clients, and similar regulations are in place across Europe. But, the draft regulation takes a radical step beyond these measures. If passed into EU law, professional services firms would be forced to sell off their more dynamic consultancy arms and become audit-only firms, which they're unlikely to do without putting up a serious fight.
Two heads are better than one
Under the draft regulation, the Big Four would also have to share work with their smaller rivals in mandatory joint audits of large corporates. What's more, compulsory rotations every nine years would prevent relationships between auditors and clients from becoming too cosy, and lapsing into complacency. Joint audits would take a progressive step towards opening up the market, yet there are concerns that introducing them could risk complicating the auditing process, causing details to fall through the cracks and allowing either auditor to avoid accepting full accountability. Forcing companies to hire two auditors would also push up their costs, making European business less competitive in the global market.
It's not the first time the Big Four have come under fire or that reforms have been on the table. Earlier this year, the House of Lords Economic Affairs Committee criticised the Big Four's market dominance in the UK and recommended that they should be investigated by the Office of Fair Trading, which made a provisional decision in July, pending further consultation, that the matter should be referred to the Competition Commission.
A formal version of Barnier's draft proposals will be submitted to the EU's Council of Ministers in November, and will then be debated by the European Parliament. It's likely that the proposals will be watered down somewhat during the deliberation process. Yet one thing is for certain: as the EU pushes for structural changes to the audit industry, the Big Four will resist a break-up of their businesses, and of their shared market hegemony. Î½