Mandatory firm rotation (MFR) audit rules have had “very little” impact, don’t create more competition between audit firms and instead increase concentration in the market, says Mazars’ UK head of PIE and global head of audit, David Herbinet.
MFR was brought in by the Financial Reporting Council (FRC) in October 2012, requiring firms in the FTSE 350 to put their audit out to tender every 10 years.
“There has been very little impact,” says Herbinet. “If anything, there is increased concentration, as opposed to less.
“What mandatory firm rotation has actually achieved is that where the non-Big Four firms had clients in these markets, they’ve been forced to lose them. So, if you’re not winning new ones and you lose your existing ones, it can only lead to increased concentration,” he adds.
Data produced by Adviser Rankings shows that in 2013 PwC audited 41 of the FTSE 100 firms, while the remaining Big Four members, EY, KPMG and Deloitte, all had less than 25 clients. By 2020, the picture had been changed dramatically by MFR regulations with no one firm auditing more than 30 percent of the FTSE 100 and PwC now auditing the least with 23 clients out of the 100.
But this was no bad thing according to Hemione Hudson, head of audit at PwC. In an email, she said: “The changing market share reflects healthy competition for audits and the changing constituency of the FTSE 100. For PwC, audit quality has to be the top priority.”
However, Herbinet says all the MFR regulations amount to is a shuffling of the pack.
“It’s reshuffling the pack, rather than healthy competition,” says Herbinet. “Most of the time, I see a number of instances where there isn’t a lot of choice and where a company will only have one Big Four firm to consider. And because there is significant market resistance to appointing non-Big Four firms for these big listed companies, then effectively there is no competition.”
Mazars’ global head of audit says he sees “huge pressure” from investors of the largest firms to use only the Big Four for audit work, in a cultural sense it was similar to the saying of the 1980’s ‘you’ll never be sacked for buying IBM’.
“There are potentially some incestuous relationships between the Big Four and these houses when you look at how big they are in the insolvency market and the corporate finance market. All of these things touch at some stage. I wouldn’t call it return of favour, but it smells like it.”
Ultimately, the MFR regulations had been a failure as they have been unable to deliver on their objectives, Herbinet says.
While the Adviser Rankings data saw the FTSE 100 audits remain the privilege of the Big Four from 2005 to 2020, other firms did see an increase in the FTSE 250, going from a combined seven clients in 2005 to 22 in 2020.
With further reforms to the audit market expected to be announced by the UK government at some point this year, Herbinet says whatever path of reform is chosen, there needs to be a way that the challenger firms can get experience within the FTSE 100.
“There needs to be some way for the firms that are less visible, less obvious perhaps, to show what they can do.
“But it’s deeply embed in mindset and the culture of most capital markets, not just the UK, so therefore you need something that will create a chemical reaction to change that view of the world.”