Leap into the unknown
23.09.2007
Sally Percy, www.accountancymagazine.com
A few months ago, as the seemingly endless takeover battle for Dutch bank ABN AMRO kicked off, I put in a call to the Barclays press office. A helpful PR man answered the phone and I asked him whether, if the proposed merger between Barclays and ABN went ahead, the audit of the enlarged entity would go out to tender since the two banks were audited by rival Big Four firms - Barclays by Pricewaterhouse-Coopers and ABN by Ernst & Young.
Given the uncertainty surrounding the takeover, the press officer was limited in what he could say, so he stuck to the facts. 'PwC has been Barclays'auditor since 1896,' he said brightly.
And suddenly the prospect of a tender seemed very unlikely indeed.
As far as relationships go, PwC and Barclays' 111-year marriage might seem particularly long-lasting, but the bank is not the only FTSE giant that appears to be unswervingly loyal to its auditor. Statistics show that changing auditor is not a decision that large companies undertake lightly - or indeed often - even when they're moving from one Big Four firm to another. On average, FTSE 100 auditors remain in situ for 48 years, while their counterparts in the FTSE 250 keep their job for around 36 years.
These figures, which have been much touted during the raging debate on audit choice, are frequently used to illustrate the continuing market domination of the Big Four.
But they also expose another issue that, although it relates to that debate, is less frequently touched on - namely, that changing auditor when you're a major public company can be a major pain in the neck.
If it ain't broke
For all the reasons that a company may consider switching auditor - corporate governance, personality clashes, concern over fees, disagreement over technical issues - there are just as many reasons not to switch.
For starters, the company has to be prepared to invest a huge amount of management and finance team time, not just in the process of selecting a new audit firm but also in getting the new audit team up to speed. Everyone from the chief executive to the most junior finance assistant is likely to be involved at some point, and the finance director, financial controller and audit committee will probably need to give up a significant proportion of their time.
Then there is risk. The audits of large companies with overseas subsidiaries are complicated activities, especially in the case of banks, and their auditors will have a vast amount of knowledge and experience - history that can be lost when the audit changes hands. 'Things get forgotten,' says Tim Gordon, head of London assurance at Ernst & Young. 'Often the client organisation moves people around and sometimes, especially in small locations, the only continuity is the audit firm.'
Switching auditor can also have implications for a company's financial reputation, particularly if that company has been struggling in the run-up to the change, and analysts may wonder if management is trying to hide something. Meanwhile, as BDO Stoy Hayward's managing partner Jeremy Newman explains, some FDs think that changing auditor could be perceived as a sign of failure on their part - a sign that they couldn't get on with their audit partner or perhaps clashed with them over an accounting treatment.
Finally there is the sheer hassle of it. 'The audit is actually not the biggest issue that companies face,' Gordon points out. 'They've got a lot of other items on their agenda and it's a complication to switch auditor. For the most part, companies are happy with their auditor, so why would they change?'
Given the importance of personality fits in business, it is unsurprising that when change does happen, it is often driven by audit partner rotation. The existing partner is rotated off the account and replaced by someone else who doesn't fit the company culture, perhaps, or else the company just decides that if there is to be a change of personnel anyway, maybe it should see what else is on offer in the marketplace.
These reasons, together with an increased focus on corporate governance, are leading to a slow increase in the turnover rate of FTSE 100 auditors, according to Deloitte partner and former BAA chief financial officer Margaret Ewing. 'l think audit committees and CFOs are looking more and more at the value they get from the audit,' she says, 'and often they perceive that value is diminishing quite significantly, partly because the incumbents may have felt they were there for life and, therefore, feel less incentivised to add value.'
At BAA, Ewing oversaw an audit tender process, where the incumbent auditor - Deloitte - ended up being replaced by PwC. Was the prospect of getting an unfamiliar audit team up to speed enough to make her blood run cold? 'No,' she answers stoutly. 'l looked at it as an opportunity to learn something new, to have some of the embedded thinking and views challenged and a new approach brought to the audit and the relationship.'
Nigel Trevelyan, director of financial control at PR firm Weber Shandwick, has had a similarly positive experience. He was involved in an audit tender process that led to a new auditor being hired at his previous employer - a large law firm - and reports few teething issues. 'The transfer process worked reasonably well,' he says. 'The people who came across started adding value and were obviously very good at what they did. That showed in the quality of the audit process in the first year.'
No choice?
Nevertheless, the risks around knowledge transfer are such that if a desire to show good corporate governance is the main reason a company decides to review its auditor, the incumbent stands a very good chance of being rehired. E&Y's Gordon believes that in these circumstances a new firm will be taken on in less than half of cases.
This is what happened at Reuters, which ended up keeping PwC as its auditor after running a thorough tender process in 2005.
'There were no issues with the existing firm at all,' says Reuters former group financial controller Carolyn Bresh. 'But we viewed it as a way to keep them on their toes, to assess whether we were getting good value for money, to see whether there were new and different techniques out there and to see if we were really getting the best in class service.' In the end PwC held on to the job because of the edge it had over its rivals in terms of technical capability and the leadership of the partner on the account.
Although Trevelyan's law firm considered using a non-Big Four auditor, none of the mid-tier firms was asked to tender for BAA's audit, and Deloitte and KPMG were the only firms invited to tender alongside PwC at Reuters. This was because Ernst & Young already did statutory accounting work at the company, and selectors didn't feel that a mid-tier firm would 'wash' with the audit committee, board and analysts.
Bresh admits a wider choice of firms would have been good/but that's not the market reality. She adds 'lf there were more large firms, we probably would have opened it up to a couple more. Certainly as events unfolded through the process, it quickly became clear that there is not a huge amount of choice at the top end of the market.'
It is precisely this lack of choice that has sparked heated debate within the profession since the Oxera report into audit concentration was published last year.
But is the practical bother of switching auditor a good enough reason for companies to stick with the status quo?
BDO's Jeremy Newman thinks not. 'It's not the easiest thing in the world [to change auditor], but it's not the most difficult thing in the world either,' he says. 'We're winning new audits every month. The business doesn't grind to a halt.'
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