Memorandum by Royal Dutch Shell plc (ADT
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 incurredfor 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
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
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
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
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