Is a market, regulatory or cartel approach to audit choice best?
Last week's Financial Reporting Council report on audit competition has generated little by way of heat or light since its publication. Initial responses were muted, as is often the way of reports written by what was effectively a committee of parties seeking to bring vested interests to bear. So I was intrigued to see Jeremy Newman of BDO take a different line last night.
Ever the contrarian, Newman bemoaned the lack of serious discussion in the wake of the report, save the FT's frosty dismissal of 'glacial progress' and Accountancy Age's coverage. We warned that the UK's conservative approach could result in the US taking the initiative in this area. (Jeremy makes no bones about saying that this dark thought was in fact his own). And he quotes the headline of our lead comment piece: 'Boldness a Dirty Word in Audit Choice Reform'.
Describing himself as 'disappointed' but 'unsurprised' by the report, he says that 'without compromise by key players (and this primarily means the Big Four) a market-led approach is unlikely to result in any significant change'.
He adds: 'The Big Four need to judge which is the biggest danger - the risk of regulatory intervention (possibly prompted by the US) or changing their behaviour towards the non Big Four firms in the hope this will be sufficient to avoid such intervention.
'Those of us who support a market led approach hope that there will be enough changes of behaviour (and this is not just by the Big Four) to make a real difference and thus head off the risk of regulatory (or Government) intervention.'
Now that's not a market-led approach in my book. It's a decision taken by the market to stave off the threat of having that decision-making capability taken away from it in the future. And that's a compromise.
In this regard the Big Four's approach is more pure. They talk of their ambitions to grow their market share. That's a market appraoch.
I think I understand the difficulty here. If a pure market approach isn't going to generate more competition at the top and a regulatory approach isn't going to work either (as Accountancy Age's leader argues) what's left?
Well, it perhaps only leaves agreement by the big six or seven firms to work together to level the playing field in the hope that this prevents a more undesirable regulatory scenario being forced upon them.
And, while that approach may be beneficial for all concerned and very much in the interests of the capital markets, that sounds too much like the behaviour of a cartel.
Best to talk about a market approach then.
I am flattered that you should respond to my blog so hope it is OK for me to respond in return. I think there is a difference between a "market approach" and a "market led approach" - and it is the latter we are discussing. The market place is already affected by regulation and thus is not "pure". Indeed the whole concept behind the MPG is a reflection that a "pure" approach is not working and all of the MPG's recommendations reflect some element of intervention. You won't be surprised that I don't think the answer is to adopt "cartel like" behaviour - though would be disappointed if you think this is just because I am a "contrarian".
Posted by Jeremy Newman | October 22, 2007 8:19 PM
Jeremy, thanks for the response. My main point, perhaps clumsily made, was that while there is no easy solution here, everyone wants to see one reached. In their efforts to find a solution everyone involved is coming at it with different motives and tempering their language. So the arguments are becoming watered down as a result. The MPG report is a prime example of that. There is a real danger then that a reform agenda then fizzles out. Which would open the way for a heavy-handed regulatory intervention when the next (inevitable) corporate crisis occurs. That's an outcome no one wants to see. Oh and by the way, contrarian was meant as a complement.
Posted by Damian Wild | October 23, 2007 2:08 PM