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

Memorandum by Royal Dutch Shell plc (ADT 39)

1.   Why did auditing become so concentrated on four global firms? For example, do economies of scale make it too difficult for smaller firms to compete?

  Economies of scale were clearly a factor in the consolidation of the auditing industry. Increasing globalisation in recent years has given further impetus to this process as multi-national companies have sought the geographical presence and breadth and depth of technical expertise which can only be provided by truly global auditing firms.

  It is difficult to see how the gap between the Big Four and the next tier of audit firms may be bridged. The level of investment required to offer a consistent high quality global service is more important than economies of scale in determining success as a global service provider. Significant costs would be incurred—for example in establishing the necessary structure and expertise and in meeting additional regulatory requirements.

2.   Does a lack of competition mean clients are charged excessive fees?

  The existing structure of the market does not necessarily mean that audit fees are excessive. They are subject to the same commercial negotiations between client and service provider as any other contractual arrangement. However, it is possible that if there were more firms with international reach and expertise, the increased competition would affect overall fee levels in the long run.

3.   Does a narrow field of competition affect objectivity of advice provided?

4.   Alternatively, does limited competition make it easier for auditors to provide unwelcome advice to clients who have relatively few choices as there is less scope to take their business elsewhere?

  Auditors give an opinion rather than advice. Because of the need to maintain their professional integrity and meet oversight requirements, we do not believe that limited narrow field of competition should result in any compromise in the quality of service or objectivity of that opinion.

5.   What is the role of auditors and should it be changed?

  The auditors' role should continue to focus on providing an opinion on the financial statements and other matters as set out in the Companies Act 2006 (and, for Shell as a Foreign Private Issuer in the USA, an opinion with regard to internal control over financial reporting pursuant to the Sarbanes-Oxley Act). At present we see no obvious benefit to our shareholders and other stakeholders of widening this role.

6.   Were auditors sufficiently sceptical when auditing banks in the run-up to the financial crisis of 2008? If not, was the lack of competition in auditing a contributory factor?

7.   What, if anything, could auditors have done to mitigate the banking crisis? How can auditors contribute to better supervision of banks?

8.   How much information should bank auditors share with the supervisory authorities and vice versa?

  Not forming part of this sector we are not in a position to comment on the role of auditors in the financial services sector.

9.   If need be, how could incentives to provide objective and, in some cases unwelcome, advice to clients be strengthened?

  We believe that auditors already have the necessary incentives (and powers as captured in relevant codes and regulations) to remain objective in their dealings with clients.

10.   Do conflicts of interest arise between audit and consultancy roles? If so, how should they be avoided or mitigated?

  To avoid any potential risk of a perceived conflict of interest in forming an appropriate audit opinion, requirements are necessary to restrict auditors taking on consultancy work for their clients (we have mechanisms in place to monitor any incidental non audit services).

  Certain work may not technically be labelled as "audit" (such as interim reviews) but is complementary to the audit itself. These costs should be disclosed but under certain circumstances use of our auditors provides efficiency benefits and would not comprise their independence.

11.   Should more competition be introduced into auditing? If so, how?

  Please refer to our responses to Questions 1 and 2 above. As regards the practicalities,we do not see that there could be a market-based solution in the foreseeable future, and believe that any more invasive interventions such as forced de-mergers or explicit restrictions on firms to either audit or consultancy work would need careful consideration to ensure the interests of clients are not adversely affected.

12.   Should the role of internal auditors be enhanced and how should they interact with external auditors?

  We do not believe any further regulation is needed with regard to internal audit. The role and the scope of activities of the internal auditors differ from those of the external auditors. However, it is important that there is interaction, particularly in the areas of risk and internal control. This promotes improved insights for both parties and, with appropriate co-ordination and testing, external auditors should be able to, in part, place reliance on the work of internal auditors thereby driving efficiencies in the process.

13.   Should the role of audit committees be enhanced?

  Whilst any guidance should be reviewed from time to time, we believe that the role and responsibilities of the audit committee as set out in the FRC's Corporate Governance Code (June 2010) and its Guidance on Audit Committees (October 2008, subject to consideration of any amendments resulting from the current consultation process) are appropriate and comprehensive.

14.   Is the auditing profession well placed to promote improvement in corporate governance?

  We would expect that the auditing profession, along with other stakeholders, is well placed to continue to contribute to future consultations to ensure that best practice in corporate governance is maintained.

21 September 2010

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