Audit firms and Corporate Governance Essay

AUDIT AND CORPORATE GOVERNANCE

12 February 2014

Introduction

Audited account houses have been under the limelight of all time since the prostration of Arthur Andersen in 2002. Recently, the competition committee ( CC ) had accused the so called “big four” as being excessively dominant and non run intoing the shareholder’s needs. The 4 dominant accounting houses are PWC, Deloitte, Ernst and Young and KPMG. In a recent determination demonstrates, in 2010, the large 4 accounting house were scrutinizing 99 of the FTSE 100 prima houses and merely three of the Big Four audit Bankss in UK. The Large 4 are ruling the market because the following grade of smaller accounting houses are much smaller in size and gross, the audit grosss of even the smallest of the Big 4 are about three times those of the largest 2nd grade house ( ParlimentUK ) . Therefore, the CC is now seeking to promote better competition within scrutinizing houses by tendering and rotary motion of scrutinizing house in order for companies to hold better bargaining power. The CC is promoting companies to alter and revolve hearers at least one time in every 5 old ages. Auditing steadfast demand to hold more competition in the market and non monopolize in order to increase transparence, beef uping answerability and independency when carry oning an audit.

Advantages of the Big 4 accounting house ruling the market

Although the CC would desire the scrutinizing market to be more competitory, nevertheless the domination of the Big 4 houses does hold several advantages. Auditing companies that have been in service with the same client for several old ages had developed an apprehension and familiarization within the hearer and the company that is being audited. Companies do be given to retain its bing hearers, particularly the large 4 because, they are deemed to be more experience and resourceful every bit compared to mid-tier auditing houses. Audit quality is higher when audits are performed by houses that have industry expertness and by offices that are big, conditions that exits about entirely among large 4 houses ( Newton et al 2013 ) . Therefore, because of familiarization, the scrutinizing company spent less clip and adult male power when scrutinizing a company every bit compared to a new hearer scrutinizing a company. Therefore, if a company is required to alter its hearers often, scrutinizing companies and companies that are being audited will so incur a higher cost. Tony Cates, UK caput of audit at KPMG, said: “ Five twelvemonth audit tendering will experience relentless to many companies, audit commissions and investors who may merely see audit quality damaged instead improved. Furthermore, the committee gauge the cost to reform will be at least ?30 million a twelvemonth once it is up and running ( Peston 2013 ) . Having more accounting houses to exchange from will be the company to incur a higher disbursal and cut down the current criterion of accounting as smaller accounting houses lack experience comptrollers.

Furthermore, the laterality of the Big 4 has created certain grade of trade name acknowledgment among the market. Therefore is merely logical for large companies that are listed in the stock exchange to name the dominated large 4 as their several hearers. The laterality of large 4 has ensured that they have the capableness to scrutinize big companies and to maintain their company private information. “ The grade of concentration in the audit market has arisen as a direct consequence of market forces and, in peculiar, the demand from investors for audit quality every bit good as appropriate capableness to set about complex audits across the world” ( ParliamentUK ) . So the large 4 has clearly demonstrated that they have the capableness and confidence to execute scrutinizing to large companies and the large 4 act as a resourceful trust to the users of fiscal statement. Furthermore, the advantages of holding good trade name acknowledgment allow the company to project their image as a planetary company. Consumers around the universe are more likely to accept the big4 accounting house as opposed to less dominated house in the market. KPMG justify that they are now practising in 150 states around the universe ( Asher 2008 ) .

The laterality of big4 have lead house to really high gross. Therefore, big4 accounting houses do have the excess hard currency to pass on developing its current employee to guarantee quality is maintained throughout. Mid-tier house are improbable to pass on extra preparation for its employee as they are non capable to vie with the big4 in term of their disbursement power. A draft study demonstrates that accounting house can better the quality of audits through instruction and developing plan to guarantee better sustainability ( Ascher 2008 ) . Therefore, with continue betterment and quality, large 4 houses will guarantee continued quality.

Disadvantages of the Big 4 accounting house ruling the market

Despite grounds that bigger houses do have the better expertness to execute a better audit, nevertheless, regulators have raised their concern that a less competitory market affects the quality of service that auditors provide to its clients. Auditor concentration reduces pick, induces complacence, cut down invention, let audit lenience, and decreases investor assurance ( UK House of Lords, 2011 ) . The domination of the large 4 has alerted the CC in oppugning the quality of the audit work performs by the hearers and the independency of the accounting house. The regulators are concerned that they are excessively dominant and do non ever run into stockholders ‘ demands ( Peston 2013 ) . The large 4 had been accused that since big companies have been reappointing the same hearers over once more, and had developed a relationship between managers and hearers. Therefore, a recent determination demonstrates that, audit house ignore the involvement of their primary stockholders which are the company’s stockholders and run intoing the demand of the direction alternatively. This is because, executive squad make up one’s mind if the house would retain its service and as a consequence of that, competition focal points on factor that are non in line with stockholders demand ( SkyNews 2013 ) .

In add-on, another disadvantage when the market is dominated by the large 4 is when a populace listed company which seek public accounting service, they will be face a tight oligopoly. Both tight oligopoly and a dominant house market construction allow the Big 4 accounting house to utilize their market power either partially or through collusion to their advantage. This is because, when one house have the dominant place in the market, the consequence may be monetary value leading. The houses with lower market portions will non hold the pick but to merely follow the monetary value alterations that is set by the dominant house ( Pai and Tolleson 2011 ) . Therefore, by holding small competition which consequences in a dominant market, such as the Big 4, the accounting houses will so hold the power to order the monetary value of the accounting fee. Furthermore, a diary article besides argued that when like-minded directors operate in the same industry and band together they normally engage in mode that are damaging to the public involvement. Adam Smith that demonstrates that when little Numberss of big rivals associated with an oligopoly have the market to act upon monetary value and to go through hazard on to other, particularly to smaller entities ( Pai and Tolleson 2011 ) . Therefore, it is of import for the scrutinizing market to stay competitory for companies to accomplish just scrutinizing fee because the standard economic theory suggests that consumer make economic determination based on cost or efficiency.

Following, another disadvantage of the laterality of the large 4 is that, the current market portion for accounting house carries excessively much of a hazard involved if one of the large 4 leave the audit market. The market could non afford any of the large 4 to be insolvent which result the large 4 to cut down to large 3 or likely 2. The exclusion of Arthur Andersen has impacted the accounting market negatively. The systematic hazard refers that the decrease of the large 4 will do even more job in the market such as major break to fiscal market and 1000s of big concern ( Huber, 2011 ) . Hence, it is of import for the market to be dominated by more than the commonly known large 4 to guarantee better competition and to avoid the hazard of another accounting house to be insolvent. Many agree that restrict pick and competition to unacceptable extent. The Association of British Insurers besides claim that the staying large 3 do non hold the capableness to absorb a failed large four house ( ParlimentUK ) .

Decision

The domination of the large 4 still raised many concern within the populace and the CC. However, holding a tight oligopolistic market does let large 4 to keep a planetary trade name that is recognizable around the universe that ensures client the highest quality. In malice of this, the CC is still concerned that the market is excessively dominated by the large 4 and will impact quality and monetary value leading in the market. Therefore, it is of import for CC and authoritiess to step in to look into the pro and cons of holding a dominated large 4 accounting houses in the market.

( 1472 words )

Work Cited:

Ascher, B 2008, “The Audit Industry: World’s Weakest Oligopoly? ’ ,The American Antitrust Institute,AAI Working Paper No. 08-03, viewed 29 January 2014.

House of Lords 2011, ‘Auditors: Market concentration and their role’ ,Authority of the House of Lords London: The Stationery Office Limited,Volume 1: Report, viewed 28 January 2014.

Huber, N, 2011, ‘Big Four break-up threat’ ,AccountancyAge,viewed 28 January 2014.

Newton, N, Wang, D, & A ; Wilkins, M 2013, ‘Does a Lack of Choice Lead to Lower Quality? Evidence from Auditor Competition and Client Restatements ‘ ,Auditing, 32, 3, pp. 31-67, Business Source Complete, EBSCOhost, viewed 27 January 2014.

Pai, K, Tolleson, T, 2011, ‘The Capture of Government Regulators by the Big 4 Accounting Firms: Some Evidence’ ,ASBBS Annual Conference, viewed 27 Janaury 2014.

ParlimentUk, ‘Concentration in the audit market’ ,ParlimentUK.com,viewed 29 January 2014.

Peston, R 2013, ‘Audit Market Competition Plan Unveiled’ ,BBC News Business,viewed 27 Janauary 2014.

Peston, R 2013, ‘Will Big Four Auditors Become More Powerful? ’ ,BBC News Business,viewed 27 January 2014.

SkyNews 2013, ‘Big Four Accountants “Dominating Market”’ ,SkyNews HD,viewed 27 January 2014.

Tolleson, T, & A ; Pai, K 2011, ‘The Big 4 Accounting Firms: Excessively Big To Fail? ’International Journal Of Business, Accounting, & A ; Finance, 5, 1, pp. 56-66, Business Source Complete, EBSCOhost, viewed 27 January 2014.

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