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Big Four keep grip on blue chip audits

Source: Reuters - Tue 27th Oct 2009

Attempts to inject more competition into firms that check company books have suffered a setback as figures released on Tuesday showed the "Big Four" auditors maintaining their stranglehold on the sector. The Financial Reporting Council (FRC) set up a market participants group three years ago which made recommendations to mitigate risks from concentration.

It proposed market-led remedies such as encouraging firms other than the Big Four to vie for contracts at blue chip companies, making changes to ownership and liability of auditors but progress has been non-existent or slow.

The FRC released figures showing the Big Four - Pricewaterhouse Coopers, KPMG, Deloitte and Ernst & Young - audited the accounts of 99 of the FTSE 100 companies in August, unchanged from February. Non-Big Four firm, BDO Stoy Hayward, audited one company in the blue chip index, sparking concerns about fallout on listed firms if any of the major auditors got into trouble.

"The FRC remains concerned about the significant uncertainty and cost which could arise in the event that one or more of the Big Four audit firms left the market" Paul Boyle, chief executive of the FRC, said in a statement.

"Regardless of the actions taken by market participants, this risk is likely to remain significant in the medium to long term. It remains to be seen whether market-led actions will prove to be sufficient to reduce this risk to an acceptable level" Boyle said.

The sector was shaken when Arthur Andersen collapsed due to its links to fraud at energy trader Enron.

Industry officials believe it is only a matter of time until lawsuits against auditors of banks and other financial firms start to pile up from investors burnt by the worst market crisis in decades. The Big Four audit the books of most of the world's blue chip firms.

Some investors defrauded by swindler Bernard Madoff added KPMG to a civil lawsuit in a New York court last Tuesday, alleging the auditor were primary players necessary to accomplish the fraud. KPMG declined to comment at the time. 

KPMG was also hit in April with a billion-dollar lawsuit over claims its "grossly negligent audits" helped trigger the collapse of New Century Financial, a top subprime mortgage lender.

The European Union's executive European Commission has been consulting with the industry to see how it could boost competition in the sector but is reluctant to take action.

In July it decided that scrapping restrictions on ownership of auditors was not a top priority.

Smaller auditors find it hard to break into the big league due to potential lawsuits from disgruntled shareholders but auditing officials say competition between the Big Four is still strong.

The Big Four also continue to dominate auditing of medium sized companies with a market share of 94 percent in August, slightly down from around 97 percent in November 2006.

The FRC said it would look at the impact of the market participants group's recommendations over the next 18 months.

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