Finance Monthly November 2019 Edition

By Richard Rossington onetheless, last month high street retailer Sports Direct pleaded with the Big Four to take over their auditing process, which, it said, a smaller firm would not be able to handle. Sky News reported that the Shirebrook company, the firm heading up Sports Direct’s insolvency, approached Deloitte, EY, PwC and KPMG to ask them to take on one of the toughest jobs in the profession. But is it actually true that any of these Big Four firms would do a better and more thorough job than a smaller firm? Challenges faced by Big Four Following the demise of Carillion and BHS, the Competition and Markets Authority (CMA) recently entertained the possibility of the Big Four being split up, forcing them to work with smaller rivals. However, it instead recommended that government officials hold the Big Four accountable when it comes to the close relationship between their auditing divisions and more lucrative consulting services, in order to avoid a conflict of interest. It also stated that it is open to revisiting the prospect of a breakup in five years if the performance of these firms does not improve. Splitting up the Big Four would certainly change the dynamic completely, and allow smaller firms to show their worth when it comes to larger Sports Direct level ordeals, but it would also create a much more competitive playing field for smaller firms, leaving large organisations without a go-to solution. Another challenge the Big Four currently face is the rise in new technologies, especially on the back of digitisation and increased regulation. According to a survey from the Chartered Institute of Internal Auditors (IIA), just under 60% of auditing firms believed these factors to be significant problems ahead in 2019. According to Christian Wolfe, a regular reporter on the Big Four firms, machine learning, artificial intelligence and blockchain accounting solutions are fair game for all smaller firms, and the way it currently works is that “if you want public financial statements that investors trust, you must use a Big Four accounting firm.” However, he points out that once you’ve eliminated the margin for human error, recording and verifying transactions will be equally as trustworthy regardless of which firm you approach for the job. That sounds a lot like a level playing field when it comes to accounting and auditing performance. Spread of audit work This leads me to discuss why in fact it is not an actual level playing field in the auditing profession. Simply put, the spread of work when it comes to the larger Carillion or BHS situations is too much for a smaller company to handle. In this regard, Sports Direct are correct. The Big Four, individually, never mind put together, have the manpower and resources, on a global level, to confront the largest tasks. Economia reports that the amount of FTSE 100 clients on retainer between the Big Four has never been closer. In 2005, EY held the least, at 19 FTSE 100 clients, while PwC held the most at 41 FTSE 100 clients. In Q3 2019 the numbers are much closer. EY now holds the least at 22 FTSE clients, while PwC still holds the most at 27 FTSE clients. Clearly, the spread between the Big Four has become more even over the past 15 years, however 100% of FTSE 100 companies are now on the books of a Big Four auditing firm. In September, Steve Smith, research manager at Adviser Rankings Ltd told Bloomberg that “the Big Four have cornered the FTSE 100 market.” And he’s not wrong. This is not yet the case with FTSE 250, but it’s not far off. According to the figures from Adviser Rankings, the Big Four currently control 95% of the FTSE 250 market in terms of number of clients, and 96% in terms of market capitalisation. The parity between the Big Four and all other auditing firms, based on the number of the UK’s largest companies that contract N "Splitting up the Big Four would certainly change the dynamic completely, and allow smaller firms to show their worth when it comes to larger Sports Direct level ordeals, but it would also create a much more competitive playing field for smaller firms, leaving large organisations without a go-to solution." 11 www.finance-monthly.com FRONT COVER FEATURE - THE BIG FOUR