Smaller accounting firms ask Big Four to share their expertise

Smaller rivals have called on the UK’s Big Four accounting firms to share their audit expertise and technology, but partners at the big firms say they fear being accused of breaking competition law if they do so.

“Part of the problem is there isn’t [enough] knowledge sitting outside of the Big Four,” said Martin Muirhead, chair of the Association of Practising Accountants, which represents 20 midsized accounting firms.

Deloitte, EY, KPMG and PwC dwarf their smaller competitors and have invested heavily in improving their audits and modernising their technology, in response to tougher regulation after auditing failures and corporate scandals at companies including BHS, Carillion and Patisserie Valerie.

The top firms “have learnt a lot over the last five years since Carillion about quality and audit methodology, and educating us would assist us in improving audit quality”, Muirhead told the Financial Times.

He also said the top firms should provide licences to use their audit technology because “smaller firms do not have the resources to invest in the technology the Big Four use”. 

The members of APA, which do not include the largest mid-tier firms such as BDO and Grant Thornton, are “not a competitive threat” to the Big Four and the dominant firms should help their smaller peers in the “public interest”, he added.

The Big Four told the FT they were open to talks on helping smaller rivals win highly regulated audits of “public interest entities” or PIEs — large listed companies and privately owned financial groups and insurers.

But partners at some of the four, which together earn 98 per cent of FTSE 350 audit fees, said they were concerned they could be accused of breaking competition law if they helped.

Delivering training to specific firms could lead to accusations of locking others out of the market, said a partner at one of the firms.

A partner at another said the Big Four’s dominance made it difficult to co-operate because “the line . . . when you’re getting to . . . or you could be even accused of being a cartel is a really bright line”. 

Several partners at big firms also signalled a reluctance to share technology, citing problems including how liability would be shared and getting the agreement of their international networks.

The government is planning to expand the definition of public interest entity — bringing the number from about 2,000 to up to 2,750 — making a larger number of businesses subject to the most rigorous audits.

The Big Four have been shedding smaller PIE clients to focus resources on their biggest audits in the face of tougher regulatory scrutiny.

The upheaval presents an opportunity for midsized firms if they are willing to accept the extra risks of PIE audits, which are more closely scrutinised by regulators and result in bigger fines when things go wrong.

One of the Big Four partners said the members of APA were a “less credible” solution to the lack of choice in the audit market compared to larger competitors such as BDO and Mazars.

“You need some scale in order to compete,” the partner said. “The back office machine that you need to do two or three PIE audits is probably not that different from what you need to do 12 or 15,” said the first Big Four partner.

Deloitte, KPMG and PwC told the FT they were open to co-operating with smaller firms. Deloitte added that “any proposals would need to be developed in close consultation with the regulator, policymakers and professional bodies, and be consistent with competition law”.

PwC said any sharing of resources would need to be done “in a way that enhances rather than undermines competition”. 

EY declined to comment.