Twelve years ago, when their audit of Enron’s last accounts heralded the demise of Arthur Andersen, the largest end of the audit market shrank to four firms.

The Competition Commission (CC) has now provisionally concluded that the audit market is restricted: companies are inhibited from switching auditors and there is a tendency for auditors to focus on satisfying the needs of management rather than shareholders. The Commission is mandated by the OFT to consider what, if anything, should be done about it.

First things first: the market’s reduced size is not the cause of today’s perceived lack of competition; it is actually the result of intense competition to sell services to a limited base of listed companies. From that turmoil the Big 4  emerged as leaders in size terms.

Mid-tier firms may well possess what it takes in terms of technical and intellectual rigour. However, auditors of rapidly expanding companies with a network of subsidiaries in all 5 continents require a truly global reach, as well as in-depth industry specialisms. For company boards the simplest default position is to go for the safety of a Big 4 appointment.

Audit is a public duty, not a service

Appointing new auditors is always a time-consuming and finely balanced judgment, and having only four firms to choose from is actually a blessing! Of the myriad services touted in Big 4 promotions, audit is invariably downplayed. After all, how do you “sell” a statutory obligation? Audit is not a “service”. It is a compulsory entrée to other, more attractive, offers. Ironically, the outcome of most tendering is determined by qualitative attributes that have little to do with auditing.

The CC highlights the difficulty of judging “audit quality” in advance of an appointment, and asks whether today’s market conditions necessarily compromise quality. My view: if audit quality is lacking, it is not because of market conditions. Audits are supposed to provide an independent opinion on the truth and fairness of accounts, yet auditors have always attempted to circumscribe that provision’s scope. That is why they continue to fall short of users’ expectations, and it has little to do with competition.

Auditing the business model

What if a client’s business model guarantees only financial oblivion? Shouldn’t that fall within auditors’ consideration?

Northern Rock’s model of borrowing short and lending long required a degree of market liquidity that dried up when banks stopped lending to each other. Asset values, at a stroke, were pulverised. The strategy had been doomed, foreseeably; similarly, bank auditors never investigated the toxic mortgage products that littered clients’ balance sheets.

Take companies continuing to sell analog products when the market is rapidly converting to digital; or which still rely on shops to sell holidays when customers are booking on-line. Auditing management’s risk-strategy could do more for “quality” than rotation of firms or partners, mandatory tendering, extended reporting, prohibition of “Big 4 only” clauses in loan documentation, or other remedies being explored by the CC.

To shift the audit focus firmly onto shareholders’ needs, auditors need an enforceable right to resist unwarranted removal by management. How else will you stem the embarrassing tide of meaningless audit reports, swiftly followed by a “client” company’s collapse?

Times have changed since I shared a symposium platform in the USA with a “Big 8” (as was then) partner. When challenged from the floor to describe a “high-quality audit”, he replied: “If there are no typos in the accounts, if we get full fee-recovery, are reappointed and not sued, then, as far I’m concerned, that’s a high-quality audit!”

Whatever else, auditors need a sense of humour.