Clamour for Big Four competition probe as Grant Thornton pulls FTSE 350 audit bids

Grant Thornton has withdrawn from bidding for FTSE 350 audit tenders, which it claims cost the firm as much as £300,000 per attempt, while rarely yielding a new contract. The firm’s decision has fuelled calls for the UK state to intervene in the British auditing market, amid claims that the Big Four’s growing consulting arms make for conflicts of interest in their auditing duties.

The dominant brands of the UK’s professional services market have come under increasing scrutiny from competition regulators in recent months. Late in 2017, this saw the world’s biggest investment consultants begin a protracted battle against a full-blown competition probe in Britain, which could see the sector placed under the watch of the Treasury. Aon Hewitt, Willis Towers Watson and Mercer had all recommended competition rules to the country’s financial watchdog, the Financial Conduct Authority, which were deemed too little too late.

The Financial Conduct Authority said it had serious concerns about the industry, and referred the case to the anti-trust authority. The industry does not currently fall under their jurisdiction, with the asset allocation advice provided by investment consultants and employee benefit consultants considered to be self-regulating. However, the FCA had been conducting a study since November, amid growing clamour for investment consultants to be forced to spin off their fiduciary management businesses in order to avoid conflicts of interest.

Now, the Big Four of the accounting and advisory world – Deloitte, EY, KPMG and PwC – look increasingly set to face a similar struggle. The Big Four’s share of FTSE 350 auditing has increased from 95% to 98% over the past five years, despite a series of EU and UK reforms aimed at tackling a lack of competition since the 2008 financial crisis. With pressure subsequently mounting on UK authorities to tackle the gang of four’s dominance, the Financial Reporting Council (FRC), which oversees the British auditing market, recently made headlines when it said a break-up of the Big Four may be necessary.

Stephen Haddrill, Chief Executive of the FRC, said he had concerns about regulators’ failure to tackle the dominance of the Big Four, adding that the rapid growth in revenues relating to consulting work for the four raised separate concerns of conflicts of interest in the market. This was perhaps most markedly illustrated by the Big Four’s alleged “feasting” on the collapse of construction firm Carillion. The firms each held numerous auditing and advisory roles with the company, costing a total of £72 million before Carillion entered administration in January – at which point PwC picked up a further lucrative contract to oversee the group’s winding down.

Haddrill and the FRC are now in talks with the UK’s Competition and Markets Authority about a potential investigation of the audit market, five years after the last competition investigation into the workings of the accountancy industry. While the Big Four are naturally attempting to assuage such concerns, their cause will not have been aided by the latest news from their largest competitor, Grant Thornton.

Grant Thornton

The UK professional services firm has decided to stop bidding for audit contracts from Britain’s largest listed companies, after Grant Thornton executives concluded it was too difficult to compete with the Big Four firms that presently dominate the market. This is not a small competitor which cannot keep up with multifaceted, global firms either. Grant Thornton is the UK’s fifth-largest accounting firm by revenues, but the firm has decided that it can no-longer afford to bid for FTSE 350 audits.

Tender processes for such contracts average out at a costly £300,000 per courtship, after which the firm routinely comes “a glorious second place”, according to Sacha Romanovitch, Grant Thornton’s Chief Executive. She added that the firm was also worried that its inability to challenge the Big Four for FTSE 350 contracts was bad for the morale of staff attempting to win these contracts. Grant Thornton will now focus on auditing the five FTSE 350 companies it presently works with – Interserve, Sports Direct, Witan Investment Trust, Woodford Patient Capital Trust and JD Wetherspoon – while rededicating efforts to markets where it is growing more rapidly, such as auditing in public sector, where it recently won a five-year contract to deliver more than 40% of audit work.

Remarking on Grant Thornton’s changed emphasis, Romanovitch said, “Structures in the [FTSE 350] market make it impossible for us to continue to succeed in it. If this space is dominated by four players and there does not seem to be market appetite to change, let’s focus on areas where we can [succeed]. You have to have that strategic clarity.”