Auditors: Market concentration and their role - Economic Affairs Committee Contents

Supplementary memorandum by Mr Steve Maslin, Grant Thornton (ADT 22)

  Having viewed a number of the oral sessions and read some of the written submissions to the Committee, I am moved to write to you to reinforce two points I made at the oral session, as I am very concerned that the Committee could be misled by aspects of the evidence supplied by some other parties. If protocols permit, I should be grateful if you would bring this note to the attention of the Committee and I would be happy for its contents to be put on the public record. As ever, I would happily take your advice on how best to deal with this matter.

  The first point concerns audit quality, a matter my firm views as a priority. I expressed the view at the hearing that the FRC had missed an opportunity in publishing the results of the 2009 findings of the AIU on the large audit firms to make a positive comment on the audit quality of some firms outside the four largest. While I am not complacent about Grant Thornton's ability to deliver high quality audits on a consistent basis, and acknowledged that the firm would be likely at some future point to have audits that the AIU believe were less than satisfactory, those 2009 AIU findings highlighted that while each of the four largest firms had audits graded "requires significant improvement" neither Grant Thornton nor BDO had any such negative findings in the audits examined by the AIU. (I have provided a summary of the 2009 AIU findings in the attached memorandum.) Not only did the FRC miss this opportunity to correct some false perceptions about relative audit quality at firms such as Grant Thornton and BDO, in publishing the 2010 AIU audit findings it allowed some commentators to perpetrate further the myth that the four largest firms have a monopoly on audit quality (for example in response to the 2010 report of AIU findings the Times ran a piece on 21 July which stated:

    "Regulators have been concerned for years that the audits of big companies are concentrated among a handful of top accountants—but if the smaller firms are not up to the job, what choice do those companies have?"

despite the fact that the AIU report did not contain criticisms of Grant Thornton or BDO). While in its own written submission to the Committee the FRC does seek to redress this balance, I continue to believe it could do much more when publicising the AIU findings to make a positive comment (where merited) about respective levels of audit quality.

  I am keen to reinforce this point now, ie that the evidence of the AIU findings is that firms such as Grant Thornton and BDO are capable of providing high quality audits at least as well as the four largest firms (and arguably on a more consistent basis), as I see that one of the largest audit firms in its written evidence has sought to make a link between size of audit firm and levels of audit quality. I believe that it would easily be possible for a reader of that submission to draw the false conclusion that the AIU's findings support the audit quality of the four largest firms over firms such as Grant Thornton and BDO. While in its 2010 report the FRC did criticise the audit work of some small firms, this criticism was clearly directed at certain firms very much smaller than the four largest and indeed much smaller than Grant Thornton or BDO.

  The second point concerns the levels of investment required, inter alia in global "audit approaches", for firms such as Grant Thornton to provide high quality audits to large corporates which operate on a global scale. I expressed the view at the hearing that Grant Thornton already has the capability to deliver high quality audits to possibly all of the FTSE 250 and indeed much of the FTSE 100 and that we have the cash resources already in place to acquire the people necessary to audit at least 20% of the FTSE 250 without diluting partner capital.

  I am keen to reinforce this point now, as I see that one of the CEOs of the four largest firms is reported to have told the Committee that his UK firm had spent approximately £40 million to roll out the firm's revised audit approach project in response to the changing needs of its clients and that the "overhaul" cost the network globally around $400 million. However, Grant Thornton (both in the UK and throughout all of the Grant Thornton International member firms which operate in approximately 100 countries) has already invested in and successfully rolled out its own modern audit approach which is enables us to meet the industry international quality kite mark (ISQC 1) and all modern audit standards and regulations. Moreover, the results of the AIU inspections, coupled with the various audit awards Grant Thornton received in 2009 (which include:

    — the CBI/Real Director Auditor of the Year (Large 6) Award (voted by the FDs if 1,000 of the UK's largest entities);

    — the Aim Auditor of the Year Award; and

    — the Accountancy Age Global Audit Firm of the Year Award

suggest to me that we have successfully implemented this modern audit approach in a way which enables Grant Thornton to continue to provide high quality audits in a way which meets the needs of its large corporate audit clients.

  I am sorry to introduce a further piece of written evidence, as I am sure that the Committee is already faced with a large amount of material. However, Simon Michaels of BDO and I have both referred to the danger in the audit competition and choice debate of false perceptions being allowed to circulate and I am very keen to reinforce Grant Thornton's record of and commitment to delivering high quality audits to large corporates on a consistent basis (without in any way being complacent about that record) and its commitment and capability to invest in securing a significantly higher proportion of FTSE 250 audits (and over time FTSE 100 audits) and indeed similar investments on an international basis.

  That increase in market penetration can only come about with a change in the buying patterns of these companies. We believe that regulatory action is necessary to provide a stimulus to change those buying patterns and we believe that the package of proposals we submitted to the Committee are a practical start point.

December 2010

Summary of AIU findings published in 2009
Requiring significant improvement / significant concerns Good or acceptable standardVery good standard Total
PwC211 114
KPMG19 112
Grant Thornton UK07 07
HCW14 05
Baker Tilly23 05
BDO05 05
Deloitte19 111
E&Y110 011
TOTALS8 58370
%11.482.9 4.32

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