You know what accountants are like.
“Free markets work.”
“Stop government interference.”
“Leave the market to get on with it.”
Blah, blah, blah.
Until, that is, it suits them to argue otherwise. Take this from the FT this morning:
A cap on the market share of UK auditors needs to be introduced to reduce the systemic threat posed by the dominance of the four biggest firms, Grant Thornton has urged.
The country’s fifth-largest auditor claims that financial markets would be thrown into chaos if one of PwC, KPMG, Deloitte or Ernst & Young – which collectively audit the majority of FTSE 100 companies – were to collapse.
Exasperated by previous attempts to dilute the power of the Big Four, Grant Thornton’s UK arm is now pushing for radical intervention by regulators and investors.
Hang on a minute. This is the fifth biggest firm of accountants in the UK saying:
- Markets don’t work
- There is an externality at play here which requires regulation
- Competition has not provided an optimal solution
- Only government action can change that sub-optimal situation
- Regulation to constrain market choice would be a good thing
Amazing, isn’t it?
But are Grant Thornton right? Yes, is my answer. Their analysis is spot on. But their solution is massively wide of the mark. First, auditors are really no good at what they claim to do. Second, they are conflicted: they sell other services. Third, why should they demand access to what is in effect a monopoly right? Fourth – isn’t this a simple statement that to rely on the Big 4 is a massive error of judgement – and yet that’s the whole basis of the policy the government is proposing in abolishing the Audit Commission?
The truth is regulation should not be used to extend a monopoly abuse which has failed to deliver what the market or society needs.
Regulation should be used to reform the supply of the service (the state is the best supplier of natural monopoly services); for demanding reform of the quality of the service (yes, auditors should audit – it’s not an unreasonable demand) and should be used to integrate audit with other social objectives on behalf of the wider stakeholder group to whom auditors should have obligation – such as tax authorities to whom there should be liability to ensure that accounts are a suitable basis for tax reporting.
That’s the reform we need.
And Grant Thornton are as a consequence, I hope, whistling in the wind.