There's something else that CFOs feel when their audit bills arrive. European companies in general have been spared the massive fee inflation that American companies experienced after Sarbanes-Oxley — where fees among companies complying with Section 404 jumped 66% between 2003 and 2005 — but they haven't escaped higher costs entirely. "With audit fees, there seems to be an immediate assumption [among auditors] that clients will accept an increase every year," sighs Jürg Wenger, CFO of Feintool International Holding, a SFr520m (€324m) Swiss industrial technology and systems supplier. "We live in a competitive world, where our customers come to us and tell us the price they're willing to pay — not the other way around." (See "Keep a Lid on It" at the end of this article.)
Shrinking Choice
Unfavourable fee trends lead to another CFO bugbear — competition. "I'd like it if there were more," says Wenger, who recalls his early days as an auditor when there were eight big audit firms. Indicative of a Europe-wide trend, the Big Four — PwC, Deloitte, KPMG and Ernst & Young — handled all but 11 of the UK's FTSE 250 audits as of August last year.
CFOs have even less choice if they are also using the Big Four for non-auditing services, such as tax advice. As Lever notes, at Tomkins, "we had a relationship with every one of the Big Four. If we wanted to change, someone else would have had to give something up." More worrying, he adds, "if one disappeared, we'd really have no choice. We would need a regulatory body — God forbid — just to preserve pricing in the market."
A solution to the lack of competition that's often discussed, but doesn't strike many CFOs as viable, is hiring a second-tier auditor, such as BDO, Grant Thornton or PKF. In CFO Europe's latest survey, nearly 60% of the 176 respondents who are currently using a Big Four firm said they would not consider a tier-two auditor the next time they have a tender. One major barrier cited were the key decision makers in their companies — the audit committee, for example — who want to stay with the tried-and-tested. The other frequently cited reason was scale. "The second tiers are too local," says Wenger of Feintool. "They need to bulk up and build an international practice. Then I think they would stand a chance."
That, of course, is easier said than done, notes Martin Wheatcroft, chief accountant of National Grid, a £8.7 billion UK and US utility. Auditor choice has been a concern for Wheatcroft in recent months. As part of a project to increase auditor competition in the UK, National Grid was among several companies that responded to recommendations developed by the Financial Reporting Council (FRC), the national reporting and governance regulator. The 15 recommendations, published in October, ranged from improving access to client information shared between incoming and outgoing auditors to mandating greater comparability between audits performed by a firm.
"We are against developing a UK-specific regime for auditing because it could end up being a bigger barrier to audit choice," Wheatcroft explains. "We suggested to the FRC that the recommendations weren't that important on their own, because a global approach is needed."
He might have a point, but the recommendations are a good start, retorts Paul George, the FRC's director of auditing and of its Professional Oversight Board (POB), which is in charge of audit regulation. "There is no quick fix that is palatable," he says. "But just putting the issue on the table has created a bigger opportunity for the non-Big Four to get in front of an audit committee and see whether they can offer their services."
Meanwhile, national regulatory bodies in Europe have been working on another programme that will have a more immediate impact on auditor governance. With a mid-2008 deadline looming, member states have been setting up independent auditor oversight bodies under the EU's Eighth Company Law Directive. In Germany, for example, that's meant "upgrading our system to achieve international competitiveness with countries that are very good in this regard," such as the US and the UK, explains Siegfried Luther, the former CFO of Bertelsmann and a member of Germany's first public auditor oversight body called APAK (for Abschlussprüferaufsichtskommission). Starting this year, the APAK, which was set up in 2005, is authorised to undertake formal reviews of the auditors of major public entities, including assessing their policies and internal controls as well as carrying out a handful of random reviews of some actual audits, which it discusses with the auditors.
It's a practice that the FRC has been undertaking for some time. But now the UK body is going one step further than the APAK — and even the US's PCAOB, considered the standard bearer among oversight bodies. Starting this year, it will publish separate reports on each of the big audit firms that it inspects, rather that a general, consolidated report as it had done in the past. Moreover, it will issue reports on the findings of the reviews of the 100 or so audits it undertakes every year, which will be sent to the auditors for them to discuss with their clients' directors.
The FRC says there are a number of reasons why it is adding this additional level of transparency. "One is that it's been given a push by audit committees, which [under UK code] are required to assess auditor effectiveness," George explains. "It also links to market competition — if directors know more about the quality of individual firms and the performance of their own auditors, they might get a better idea of who to select. It will help companies distinguish auditors in different ways than merely using size for a proxy for quality. It may or may not be helpful, but one can be sure that recipients of such independent reports will take notice of them."
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