Grant Thornton calls for independent public body to appoint auditors
Britain’s fifth largest auditing and advisory firm has recommended a radical shake-up to the audit tendering process for large listed companies. Grant Thornton announced withdrew from bidding for FTSE 350 audit tenders this year, citing the Big Four’s dominance in the market, which Grant Thornton claimed cost the firm as much as £300,000 an attempt, while rarely yielding a new contract.
The Big Four’s alleged strangle-hold on the UK’s auditing market has been the source of a sustained debate in recent months. EY, KPMG, Deloitte and PwC currently audit 99 of the FTSE 100, while the quartet of the world’s largest accounting and consulting firms grew their portion of FTSE 350 auditing 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 Grant Thornton no longer vying for contracts amid the 100 companies listed on the London Stock Exchange with the highest market capitalisation, the gang of four seem set to further increase that share.
When the firm announced it was stepping back from tenders for FTSE 350 auditing, claiming each tender cost the firm as much as £300,000, while often failing to bear fruit, Grant Thornton’s decision breathed new life into calls for the UK state to intervene in the British auditing market. Critics cited concerns that the Big Four’s growing consulting arms make for conflicts of interest in their auditing duties, and would lead to a situation similar to that which caused the collapse of US energy giant Enron at the turn of the century.
These fears were perhaps most explicitly realised when the Big Four was pilloried by a Parliamentary committee for allegedly “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. Following the outsourcing company’s liquidation, KPMG – Carillion’s long-time external auditors – has since become the firm at the centre of the Carillion controversy, having fulfilled this role since 1999, through until the time of its profit warnings and consequent collapse. As a result, the Financial Reporting Council (FRC) is currently investigating the firm, covering the years of 2014, 2015 and 2016 and additional audit work carried out in 2017.
Stephen Haddrill, Chief Executive of the FRC, has since noted 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. As pressure continued to mount on UK authorities to tackle the gang of four’s dominance, the FRC, which oversees the British auditing market, went further than this, making headlines when it said a break-up of the Big Four may be necessary.
While the response from the Big Four’s bosses was somewhat muted, as this news broke, it was notable that one of the firms most openly opposed to such an intervention was Grant Thornton. Despite the firm having apparently suffered at the hands of the Big Four’s dominance, a statement issued by the UK’s fifth largest accounting firm said, “We fundamentally do not believe that this is the solution to the existing systemic issues in the audit market.”
Now, as the firm bids to avert further action which it believes could impact the market negatively, Grant Thornton has proposed an independent public body to lead auditor selection for large listed companies and other public interest entities (PIEs). The firm is also proposing that auditors of PIEs should not be allowed to do non-audit services, in order to “make it simple”, and this would avert some level of the conflict of interest which so concerns critics of the Big Four’s increasing monopoly. The news comes as the Competition and Markets Authority is currently considering whether to launch its second review of the audit market.
According to Jon Roberts, Head of Assurance at Grant Thornton UK, the measures by his firm would be reassuring for both auditors and clients, who would be able to hold their heads high “from an independence point of view.” He added that the firm “wanted to go on the record and set out” its position on the key issues facing audit, and that "the procurement side was more fixable in the short-term,” before pointing to the existing model for government authorities – Public Sector Audit Appointments – as a model to emulate.
“This all stems from trust and integrity, and what is in the public interest. The public interest is key… We’re seeking to bring in the interest of wider stakeholders – pensioners, employees, supply chain – in addition to the current definition around capital markets.”
– Jon Roberts, Grant Thornton
Roberts expanded, “This all stems from trust and integrity, and what is in the public interest. The public interest is key, we think that the current definition is quite narrow, and we will be arguing for an examination of that. We’re seeking to bring in the interest of wider stakeholders – pensioners, employees, supply chain – in addition to the current definition around capital markets.”
The firm is gaining traction for its recommendations, according to Roberts, compared to when the discussion began in summer. At that time, he said the firm felt like a “lone voice”, but is steadily increasing its support. This may be because, as Roberts admitted to the press, it will take “quite a change in thinking” from the client side, while the Big Four have not responded either positively or negatively yet.
One response that the audit proposals have received came from the UK’s collective business organisation, the Confederation of British Industry. In a statement, a CBI spokesperson said the organisation holds regular conversations with companies of all sizes across the sectors, covering a range of topics, including, “the future of the audit market, which is a vital foundation for trust in business.”
The spokesperson added, “The CBI is discussing what these changes might look like with all relevant parties but – like many others – we are still forming a view on what the right solutions are to ensure the profession retains the confidence of the public, markets and regulators.”
