Proxima responds to the Competition Commission’s audit market report
Feb 22, 2013 4:48:00 AM
LONDON, UK - 22 February 2013. Proxima responded to today's preliminary findings from the Competition Commission report into the audit market.
Guy Strafford, Chief Client Officer at Proxima, said: "The Commission's options for change only cover half the story. A more structural change to the auditing market is the only longer term answer if shareholder's interests are to be best represented.
"The CC has missed that audit competition is significantly weakened by the fact that whichever member of the Big 4 is providing audit services to a FTSE company, it's competitors are often quite happy being paid even greater fees to provide other consulting services to the same business. The incentives for competing hard for an audit are undermined by the potential rewards from other consulting services. It's a win-win for the Big 4 - if the audit is lost, there are greater prizes on offer.
"Therefore, to get the best from the audit requires the oxygen of competition. Four participants are not enough to drive innovation, service improvement and value which are needed not only at the point of a tender, but also throughout the duration of the audit relationship. The next tier of auditors needs recognising as a viable alternative to the big four - the perception needs addressing as urgently as the implementation.
"Only more fundamental change born of greater competition from more players can deliver the impartiality and constant improvement required to protect shareholder value. In its final conclusions, the Competition Commission has to recommend how to increase the number of marketplace participants. It's in the name - the 'Competition Commission' needs to create greater, more transparent and productive competition."
1 A recent FTSE tender we undertook saw the other members of the Big 4 each earning more in consulting fees than the value of the audit. Proxima also found that the tender led to substantial changes in the way an audit was undertaken, driving more value for the shareholders.
2 Proxima's view, based on experience of tendering blue-chip audit assignments, is that there is no fundamental barrier to smaller firms executing most major audits as well as the Big 4. It is an issue of perception as much as one of resource. The investment community appears comfortable with a broader range of providers.
3 If there are concerns about capability these are easily resolved by testing on a limited level to provide related services such as internal audit, or asking them to audit minor subsidiaries, both of which allow management to draw their own conclusions and builds the market.
Media Contact:FTI Consulting, for Proxima
+44 (0)20 7831 3113