Big Four Audits Nearly All of FTSE 350

New study suggests many large U.K. companies have a choice of just two or three firms.
Stephen TaubApril 13, 2006

Virtually every large public company in the United Kingdom uses one of the four largest accounting firms, according to a study published by that country’s Department of Trade and Industry (DTI) in conjunction with the Financial Reporting Council.

The research, which was done by Oxera, an independent economic consulting firm, found that 97 percent of the companies that comprise the FTSE 350 are audited by KPMG, Deloitte, PricewaterhouseCoopers, or Ernst & Young. What’s more, many large companies said they could only choose between two or three auditors.

Nevertheless, middle-ranking or new audit firms are unlikely to be able to break into the FTSE 350 audit market. “Any new entrant would have to overcome image problems, demonstrate sector-specific skills, international coverage and high quality staff to win audits,” according to the study.

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Many U.K. companies are wary of picking a mid-tier auditor because they feel the firm may not be able to handle audits of international subsidiaries or because such a move might upset shareholders, a story in the Financial Times points out.

The study’s conclusions raise ominous concerns about the consequences of one of the Big Four going out of business. “The loss of a Big Four firm could create serious problems for some companies and damage investor confidence,” the study’s authors concluded.

The study was based on interviews with auditors, regulators, company directors and investors, according to the FT. The paper said that the study also found that a third of the chairmen of FTSE 350 audit committees felt their companies did not have a sufficient choice of auditor.

“If the market wants more choice, we don’t resist that suggestion,” Nick Pasricha, managing partner at Ernst & Young, told the newspaper. “The question is, how do you do it?”