A review by the U.K. Financial Reporting Council (FRC) found large companies will instinctively hire a Big Four firm as auditor every time, despite efforts by the regulator to break their dominance and open up the country’s audit market to smaller competitors.
The FRC survey regarding audit committee chairs’ views on—and approach to—audit quality found most companies’ choice of auditor is often between two Big Four firms whenever a tender is put out.
While around 7 out of 10 audit chairs said they had invited audit firms outside the Big Four to participate in tenders, many reported ruling out a smaller firm at the outset because they felt they lacked the relevant expertise or capacity. Smaller firms often agreed with this assessment.
Efforts by the FRC to prohibit firms from providing audit clients with non-audit services by 2024 may also be adversely impacting competition. Some audit chairs, for example, reported Big Four firms might not bid if they already had more lucrative contracts in place for non-audit work.
At the same time, some non-Big Four firms have declined to bid for the work, say audit chairs, leaving companies little choice but to engage either KPMG, EY, PwC, or Deloitte—if they can get them.
Last year, both Grant Thornton and BDO said they were not especially looking to challenge the Big Four’s dominance as auditors of FTSE companies, largely due to the increased scrutiny that now accompanies such engagements (as well as the potential reputational backlash if there is a significant governance failure or corporate collapse).
The review also highlighted other worrying trends. According to the FRC, it was “not always clear” that audit chairs distinguished between a good quality service and a good quality audit, with some respondents reporting difficulties in assessing quality throughout the engagement.
To address this problem, audit chairs said they focused on making the tender process as rigorous as possible so audit firms addressed client concerns during their pitches. Audit chairs also insisted on using a number of proxy measures to keep their auditors in check.
However, the FRC found there could be little challenge once audit work began. The regulator says many audit chairs reported challenging auditors’ work mostly during the planning phase of the audit. Even then, any challenge often focused on the scope of the audit but did not always seem to concern audit materiality or the level at which misstatements were reported to the audit committee.
Challenge was less apparent in relation to auditors’ judgements and findings, said the FRC, and few audit chairs mentioned regularly challenging company management, either.
Audit chairs are not solely to blame for this lack of challenge, however. Shareholders have also shown a lack of engagement, with the majority of audit chairs suggesting “shareholders were uninterested, or that audit was not readily accessible to them.”