Audit Concentration - Lack of Competition in the Large Company Audit Market - Assignment Example

? Audit concentration – Lack of competition in the large company audit market Table of Contents Introduction 3 Plan of Competition Commission 3 Main concerns 4 Step taken to increase the competition in the audit market 6 Conclusion 7 Works Cited 9 Name of Student: Name of Professor: Course Number: Date of Paper: Audit concentration – Lack of competition in the large company audit market Introduction The report highlights the plan formulated by Competition Commission (CC) in July 2013 which shook the Big Four auditing companies under FTSE 350 audit market, PwC, Deloitte, KPMG and EY. The plan indicated that the Big Four companies should tender the audit report every five years which was actually tendered till then every 10 years (“Big Four Dismiss Claims They are Failing Shareholders”). The main idea behind the plan of CC was to expose the other audit companies to the market apart from the Big Four companies. The Big Four Companies audit almost all the companies under FTSE 100 and FTSE 350. The report elaborates whether the auditing of the large companies in the hands of the Big Four companies are a matter of concern or not (“Big Four find Competition Commission audit conclusions Lacking”). Though the plan of CC was not successful but there was question whether other audit companies are to be given the chance of auditing the large companies. The report throws light on the concerns that can be raised against the operation of the Big Four companies (Burgess 234). Plan of Competition Commission The Competition Commission (CC) on July 2013 declared that the Big Four companies should tender the audit reports of the large companies every five years instead of 10 years. It shook the Big four companies as they felt the threat from the other Mid-tier audit companies who will get the chance of establishing their business by taking their market (Frambling and Johnstone 145). Thus they opposed to the proposal. The proposal did not succeed as the case did not move further. The proposal was taken by CC to expose other Mid-tier audit companies and other small audit companies to audit large companies’ financial statement (“Non-Audit Remains Point for Discussion within Europe”). As a result those companies can make their strong position in the audit market which can also threaten the operation of the Big Four companies (“FRC Audit Rules Should Have Been Given Time to Take Root”). Main concerns The proposal was not accepted by the Big four companies but the issue was questioned and thus became a topic of high concern. The main concerns that can be raised regarding the issue are the following: 1) There are high barriers to the entry of other audit firms: A crucial barrier for the entry of the second tier audit firms in the market for auditing the large companies as these companies prefers to be audited by the Big Four companies (Millichamp 234). The main concern of the Big Four companies dominating the market lies in the lack of resources for auditing the large companies (“FRC Rubbishes Mandatory Five Year Audit Tendering”). Investments in the auditing process is risky as there is high cost of scaling for meeting the resources that are required for auditing of the large companies. Thus this barrier has limited the entry of the audit firms into the market other than the Big Four firms as the Mid tier audit firms do not have the investment potential for the audit process. Thus, there was little competition in the audit market for the Big four companies (“FRC Disagrees with Competition Commission Rotation Plans”). 2) Negative perceptions regarding the audit firms: It is important to note that reputation is a significant driver for choosing the auditor. Thus the difference between the Mid-tier audit companies and the Big Four Companies are made by comparing the reputation of the both. Thus the Big Four companies are preferred by the large companies for auditing their financial statements. Studies have pointed out the fact that very few large companies (less than 10%) will prefer Mid-tier companies (Gary and Manson 432). Other do not prefer them as they do not consider the Mid-tier audit firms to be capable of auditing their financial statements. The majority of the large companies choose the Big Four companies for their good reputation. Thus they dominate over other audit firms. The audit committees have the knowledge of the large gap that exists between the real capabilities of the Big Four companies and the Mid-tier companies and the perceptions that are created by the companies (“Competition Commission Outlines Five-Year Audit Tenders”). 3) There is lack of choice of the audit companies: For the market in United Kingdom (UK) there has been a lack of choices of the providers of audit service. As a result of the regulations that are imposed on the audit firms regarding the non-audit work and the audit work, the large companies get fewer option other than the Big Four firms to rely upon (“The global audit profession and the international financial architecture: Understanding regulatory relationships at a time of financial crisis”). Thus in the short term future they choose those audit firms those who have the capability to survive in the market after meeting the regulations (Shim and Seigal 12). As a result of the high reliance on the Big Four audit firms, the auditing prices have been higher. As a result, the Big Four firms get the dominance and there is no downward movement in the audit prices (Kimbell 143). 4) Big Four to Three Scenarios: The dependence of the large companies on the Big Four firms can result in loss of investor interest on the companies. This scenario can pop up if there is a loss of one of the Big Four companies (Warren 265). Thus the regulators will have to take abrupt actions regarding the loss of the firm and make changes to the independent rules. These would impact the companies which are audited by the losing audit firm and these companies will lack in option for choosing their next auditing company. The changes in the independent rules may evoke the investor for not relying upon the new audit report made by the new auditing firms. Thus the large firms can get affected by the incidence (“The construction of audit ability: MBA rankings and assurance in practice”). These will have a significant impact on the capital market of the United Kingdom as the investors will not trust the auditor’s report published by the large companies (“When you make manager, we put a big mountain in front of you: An ethnography of managers a Big 4 Accounting Firm”). The investor thus lose their confidence as they think that the audit report by the new auditing firm may be flawed which may result in disaster for them (“Competition Commission Aims To Break Big Four Dominance”). Step taken to increase the competition in the audit market The Competition Commission in July 2013 gave the proposal of tendering audit report every five years instead of ten years by the auditing firms. This was a shock for the Big Four firms since they were dominating firms in the audit market (Kumar and Sharma 234). This proposal was the step taken in favor of the Mid-tier and small audit companies for getting the chance of auditing the financial statement of the larger firms who only relied on the Big Four companies. These Mid-tier companies who do not get the chance to gain a good reputation will get their real position if the proposal is approved. But the proposal was not approved and therefore the situation remained the same as the Big Four firms dominated over the audit market in United Kingdom. The large companies under FTSE 100 and FTSE 350 rely on these Big Four companies which stop them from opting for those other audit companies. The audit market has not got too many better options than Big Four firms, if the companies opt to choose from these fewer options they might land in danger themselves since the investors may not find it reliable to trust on the audit report of the new audit company. In one way, these reliance is very dangerous for the companies as if the Big Four becomes Big Three it may bring big wave of changes in the regulation and also in the investor interest. Though the proposals would have brought opportunities for the small and Mid-tier audit firms to audit the financial statements of the big companies but on the other hand the large companies may lose their potential investor base (“Investor Power at Core of Competition Commission Remedies”). The reason behind the loss of the potential investors is that they might not trust the audit report of the new audit company. As a result they may stop investing in the companies which will bring loss to the same. Thus the large companies may find it difficult to trust a new mid tier auditing firm for auditing their financial statements. Thus the new entry of the audit firms may not be encouraged by the large companies and the regulation has to be very stringent so that there will be no mistake in auditing. The changes in regulation may also cause trouble for the relying companies as they may lose the potential customer and investor base. Conclusion It can be concluded that the reliance on the Big Four audit firms by the large companies under FTSE 100 and FTSE 350 is logical and practical. The regulation should be stringent so that the Mid tier audit firms should also develop themselves like the Big Four audit firms so that the large companies trust their audit and non-audit works. Thus the large companies can get the opportunities to explore new audit firms which will safeguard their positions better in case of the loss of any of the Big Four companies. Works Cited “Big Four Dismiss Claims They are Failing Shareholders.” Accountancy Age. Incisive Media Investments Limited. 22 Feb. 2013. Web. 16 October 2013. “Big Four find Competition Commission audit conclusions Lacking.” Accountancy Age. Incisive Media Investments Limited. 8 Apr. 2013. Web. 16 October 2013. Burgess, Robin. New principles of best practice in clinical audit. Abingdon: Radcliffe Publishing Ltd. 2011. Print. “Competition Commission Aims To Break Big Four Dominance.” Accountancy Age. Incisive Media Investments Limited. 22 Feb. 2013. Web. 16 October 2013. “Competition Commission Outlines Five-Year Audit Tenders.” Accountancy Age. Incisive Media Investments Limited. 22 Jul. 2013. Web. 16 October 2013. Frambling, Audrey and, Karla Johnstone. Auditing. New Jersey: Cengage Learning. 2012. Print. “FRC Audit Rules Should Have Been Given Time To Take Root.” Accountancy Age. Incisive Media Investments Limited. 24 Jul. 2013. Web. 16 October 2013. “FRC Disagrees With Competition Commission Rotation Plans.” Accountancy Age. Incisive Media Investments Limited. 20 Mar. 2013. Web. 16 October 2013. “FRC Rubbishes Mandatory Five Year Audit Tendering.” Accountancy Age. Incisive Media Investments Limited. 13 Aug. 2013. Web. 16 October 2013. Gary, Iain and Stuart Manson. The audit process: Principles, practice and cases. London: Thomson Learning. 2002. Print. “Investor Power At Core Of Competition Commission Remedies.” Accountancy Age. Incisive Media Investments Limited. 26 Feb. 2013. Web. 16 October 2013. Kimbell, Lucy. Audit. New Jersey: Cengage Learning. 2002. Print. Kumar, Ravinder and Virender Sharma. Auditing : Principles and practice. New Delhi: Prentice Hall of India Private Limited. 2005. Print Millichamp, Allan. Auditing. London: Thomson Learning. 2002. Print. “Non-Audit Remains Point for Discussion within Europe.” Accountancy Age. Incisive Media Investments Limited. 25 Feb. 2013. Web. 16 October 2013. Shim, Jae K. and Joel G. Seigel. Handbook of financial analysis, forecasting, and modelling. New York: CCH. 2007. Print. “The construction of audit ability: MBA rankings and assurance in practice.” Accounting, Organizations and Society (2009):119–140. Web. 16 October 2013. “The global audit profession and the international financial architecture: Understanding regulatory relationships at a time of financial crisis.” Accounting, Organizations and Society(2009) : 810-825. Web. 16 October 2013. Warren, Carl. Managerial accounting. Connecticut: Cengage Learning. 2009. Print. “When you make manager, we put a big mountain in front of you: An ethnography of managers a Big 4 Accounting Firm.” Accounting, Organizations and Society (2011): 514-533. Web. 16 October 2013. Read More