BDO, the world’s
fifth largest accountancy network, is calling for intervention in the
audit market, in particular to prevent the largest four networks from
using their dominant position to acquire firms outside the ‘Big Four’,
particularly in emerging markets.
On submitting the BDO response to the European Commission’s Green Paper: ‘Audit Policy: Lessons from the Crisis’, BDO CEO Jeremy Newman said:
"We welcome the indication that the Commission is prepared to intervene in the market in which BDO and its competitors operate, particularly to address the issue of concentration. We have previously supported a market-based response but it is clear that this has not been effective and that some regulatory and/or Governmental action is now required.
“More choice in the
market for the audit of the largest companies is necessary. Should one
of the four dominant audit networks leave the market for any reason,
there is a real likelihood of severe disruption. Accordingly, we believe
that any of the four dominant firms is potentially ‘too big to fail’.
Action needs to be taken now to address this issue”, said Jeremy Newman.
BDO is also urging the Commission to recognise the importance of networks outside the ‘Big Four’ being able to develop and grow their businesses in developing countries, in order to provide greater choice in the audit market as a whole. Jeremy Newman said:
“The Commission must consider how best to prevent the ‘Big Four’ from becoming even larger by acquiring member firms of the other large networks, including in countries outside the EU. We are asking the Commission to engage with regulators and competition authorities in G20 and significant emerging economies to take appropriate measures to prevent the largest firms taking advantage of their dominant market position at the expense of other market participants.”
Newman cites the recent acquisition in Brazil of the Grant Thornton firm - which at the time was the largest firm outside the ‘Big Four’- by Ernst & Young. There has been similar takeover activity in the French audit market, with three major firms being acquired by ‘Big Four’ firms in recent years, including BDO’s own former member firm in France.
In response to concerns about ‘Big Four bias’, BDO has suggested intervention in a number of other areas including the outlawing of all artificial intervention by third parties in the appointment of auditors; using public procurement policies to actively seek to establish a more competitive landscape by weighting the rules towards qualified non 'Big Four' firms; and the establishment of mechanisms to facilitate the involvement of shareholders in the appointment of auditors.
Jeremy Newman noted that BDO Member Firms have lost audit clients in various jurisdictions that were forced by lenders to switch to a ‘Big Four’ auditor. Similarly, BDO firms have failed to win prospective clients due to express or implicit application of such bias by lenders, despite the borrowers expressing their preference to appoint BDO. He said:
"The invidious practice of restrictive clauses requiring the use of a ‘Big Four’ audit firm, as found in lending covenants of financial institutions and in some elements of the public sector, should be outlawed. They reflect and perpetuate concentration without regard to the quality or expertise of other audit firms and represent an unacceptable third-party intervention in the appointment of the statutory auditor. The prohibition of the written clauses themselves would be an excellent starting point in the elimination of the behavioural bias underlying the practice, but verbal imposition of these requirements, however expressed, should also be prohibited.
“Regulators and Governments should do more to acknowledge the quality of other significant networks”, concludes Newman. “For example, using public procurement practices to foster a more competitive marketplace would also send a message to the corporate community that firms outside the ‘Big Four’ have the dedication to quality to carry out complex assignments”.