Grant Thornton UK LLP
Presentation to the Competition Commission
on the market investigation into the supply of
statutory audit services to large companies in the UK
.
Agenda
• Introduction
• Overview of Grant Thornton and our strategy
• Grant Thornton has the capability and ambition to build audit
presence in the FTSE 350
• Grant Thornton has not been successful in penetrating the
FTSE 350
• What stops Grant Thornton from auditing more of the FTSE 350?
• The supply of audit to FTSE 350 is highly concentrated
• Adverse effects of concentration on the FTSE 350
• Effective remedies are available
• Beneficial impact of intervention
• Conclusion
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©2012 Grant Thornton UK LLP. All rights reserved.
Introduction
Scott Barnes
CEO, Grant Thornton UK
David Maxwell
Member of GT National Leadership Board
Steve Maslin
Chairman of GT Partnership Oversight Board
Martin Drew
Manager, Public Policy Team
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©2012 Grant Thornton UK LLP. All rights reserved.
Overview of Grant Thornton
Grant Thornton International
More than 2,500 partners and 30,000 staff provide clients with distinctive, high quality and
personalised service in over 100 countries, including all of the major international business
hubs.
Grant Thornton
International Limited
one of the world’s leading
international organisations of
independently owned and managed
accounting and consulting firms
providing assurance, tax and
specialist advice to businesses and
their owners
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©2012 Grant Thornton UK LLP. All rights reserved.
Overview of Grant Thornton: Grant Thornton
International
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©2012 Grant Thornton UK LLP. All rights reserved.
Overview of Grant Thornton: Grant Thornton UK LLP
Grant Thornton UK LLP
the leading provider of audit, tax, advisory and specialist services
for the mid-corporate sector
more than 200 partners and over 4,000 staff
27 offices and 3 staff support sites nationwide
member firm within Grant Thornton International Ltd
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©2012 Grant Thornton UK LLP. All rights reserved.
Grant Thornton UK LLP : Credentials
•
Best Tax Investigations Team (2010),
Best Tax Team in a large firm (2009,
2008 & 2006)
•
Corporate Financier of the Year (2010)
•
“Accountancy Firm of the Year” at the
M&A Awards (2010)
•
Auditor of the Year (Large Six)- FDs'
Excellence Awards 2010 & 2011
•
"Accountant of the year" at the Growth
Company Awards (2010)
•
No. 1 auditor of AiM companies
(Hemscott, 2010)
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©2012 Grant Thornton UK LLP. All rights reserved.
Grant Thornton UK LLP : Credentials
Social Media award for the
best use of blogger relations
in graduate recruitment
Top accountancy firm to work for by
graduates
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©2012 Grant Thornton UK LLP. All rights reserved.
About Grant Thornton UK LLP - audit services
• £123m turnover (representing 1/3 of GT UK)
• Audit 6,000 companies nationwide
• Present as advisor in all the major capital markets
• Global audit methodology and IT platform applied to all audits
• National audit quality review function and specialist national
technical team
• Nationwide training and development centres for all audit staff
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©2012 Grant Thornton UK LLP. All rights reserved.
Grant Thornton - Ambition 2015 strategy
Grant Thornton targets for 2015
• target growth in scale and stature
• become a beacon for talented people and for dynamic businesses
• focus on large privately held and smaller listed businesses, as well as
public sector
• focus on sector capabilities where we have strength locally and globally
Large listed market
• focus on specific large listed businesses within our sector strengths
• target of increasing our presence in the FTSE 350 by 2015
• FTSE 350 provides an opportunity to enhance our profile, as well as
responding to market encouragement for further competition.
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©2012 Grant Thornton UK LLP. All rights reserved.
Grant Thornton - Ambition 2015 strategy
2011 total GT UK fees by entity type (£m)
2015 target GT UK fees by entity type (£m)
[Confidential - table redacted]
[Confidential - table redacted]
Total fees = £351m
Total fees = £509m
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©2012 Grant Thornton UK LLP. All rights reserved.
Grant Thornton - investment in large listed market
International network
with member firms in all
major overseas
jurisdictions
Responding to own
initiative market tests
and research to target
FTSE entities
Dedicated large corporates
team selling into top FTSE
350 companies
Grant Thornton
investment in large
listed market
Global audit
methodology and IT
platform
Responding to tenders
in FTSE 350 and
successfully auditing
FTSE 350 companies
Advisory and tax
services sold extensively
into FTSE 100
Continued investment in
graduate recruitment,
new staff, partners and
teams
Investment in national
technical and
regulatory teams to
monitor audit quality
However…….…..without regulatory stimulus Grant Thornton will continue
to be locked-out of the large listed audit market
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©2012 Grant Thornton UK LLP. All rights reserved.
Grant Thornton and the audit market inquiry
• we welcome the CC review and are enthusiastic
to play our part
• the CC process is a one-off opportunity to remedy
failings in the market to benefit customers of audit
services
• we believe regulatory intervention is a necessity.
Our strategy clearly sets out our ambition in the FTSE 350 audit market.
Firms like Grant Thornton will build presence in the FTSE 350 if
intervention reduces barriers to the market.
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©2012 Grant Thornton UK LLP. All rights reserved.
Grant Thornton has the capabilities to build presence
in the FTSE 350
Substantial
international
operations and
capabilities
Consistent audit quality
offering within GTI as
well as consistent audit
quality with the Big-4
Significant UK
presence - 27
offices, 4000
staff
Auditor to a significant
portfolio of large private
clients with characteristics
of FTSE 350 companies
©2012 Grant Thornton UK LLP. All rights reserved.
Full service
offering - tax,
corporate finance,
advisory, recovery,
DD, business risk
services
Existing positive
experience
within the FTSE
350 (auditor to
5 FTSE 350
companies)
Approved by
NAO and Audit
Commission
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Grant Thornton has the capabilities to build presence
in the FTSE 350 : audit quality
•
•
Comparable audit quality record with Big-4 from AIU public reports
only 1 FRRP press release issued on a GT client since 2005, less than the other
major firms
(table shows average number of inspected audit files during last 2 reviews by the AIU reviews)
Grant Thornton
Big-4
Requiring
improvement
Requiring
improvement
Good or
acceptable
Good or
acceptable
0%
50%
©2012 Grant Thornton UK LLP. All rights reserved.
100%
0%
50%
100%
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Grant Thornton has the capabilities to build presence
in the FTSE 350 : comparable audits
• Grant Thornton successfully audits 5 FTSE 350 companies at present,
including Sports Direct International PLC (ranked approximately 156 out
of the FTSE 350 by market cap)
• Plus 150 subsidiaries across 27 countries of one of the largest FTSE
100 companies
• Grant Thornton has been approved by the National Audit Office and
Audit Commission to audit substantial publicly funded bodies such as
Non-Department Public Bodies and local authorities
• The firm conducts s166 skilled persons reports in respect of companies
in the regulated financial services sector, including 2 in the FTSE 100
and 2 in the FTSE 250
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©2012 Grant Thornton UK LLP. All rights reserved.
Grant Thornton has the capabilities to build presence
in the FTSE 350 : FTSE 350 audit provision
Case study
[confidential - text redacted]
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©2012 Grant Thornton UK LLP. All rights reserved.
Grant Thornton has the capabilities to build presence
in the FTSE 350 : comparable audits
Grant Thornton provides audit services to a number of large private companies with attributes
akin to that of a typical FTSE 350 group.
[Confidential - text redacted]
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©2012 Grant Thornton UK LLP. All rights reserved.
Grant Thornton has the capabilities to build presence
in the FTSE 350 : non-audit services
Grant Thornton provides non-audit services to a number of large companies, both in the
FTSE 350 and for other large public and private companies.
[Confidential - text redacted]
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©2012 Grant Thornton UK LLP. All rights reserved.
Analysis of FTSE 350 companies by market
capitalisation showing audit fee
The graph shows that a significant proportion of the FTSE 350 has a market capitalisation
and audit fee similar to many private companies which Grant Thornton audits at present.
62 companies in this
band which GT are
presently unlikely to
tender for
39 companies
in this band for
which GT would
tender.
249 companies in this band GT have the capabilities to
audit companies in these
parameters, and already do
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©2012 Grant Thornton UK LLP. All rights reserved.
Grant Thornton has not been successful in
penetrating the FTSE 350 - FTSE 350
FTSE 350 audits
•
•
4 key players
96% of the market (GT 1%)
©2012 Grant Thornton UK LLP. All rights reserved.
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Grant Thornton has been more successful in
penetrating the main market
Main market audits
•
Big-4 have 78% of the market (GT 9%)
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Grant Thornton has been more successful in
penetrating large private companies
Largest 350 private company audits
•
Big-4 have 65% of the market (GT 7%)
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©2012 Grant Thornton UK LLP. All rights reserved.
Grant Thornton has been more successful in
penetrating private companies
Largest 2,070 private company audits (equivalent to main + AIM market)
•
Big-4 have 42% of the market (GT 8%)
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©2012 Grant Thornton UK LLP. All rights reserved.
Grant Thornton has not been successful in
penetrating the FTSE 350 - summary
•
Grant Thornton has the ambition to increase its presence in the FTSE 350
•
Grant Thornton has the capabilities to increase its presence in the FTSE
350
•
Grant Thornton has and is making investment to increase its presence in
the FTSE 350
•
Grant Thornton has significantly more presence in other capital markets
and in the large private market
•
Grant Thornton can be more successful in providing audit services to FTSE
350 if barriers to entry and expansion are reduced
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©2012 Grant Thornton UK LLP. All rights reserved.
What stops GT from auditing more of the FTSE 350?
Big 4 reputation
Misunderstanding
of ISA 600
Institutional bias
in favour of Big-4
Low levels of
switching &
tendering
Lack of
transparency
over audit quality
Contractual
restrictions over
auditor
appointment
Use of incumbent
auditor for nonaudit services
"IBM factor" on
the part of audit
committees
Big-4 behaviour coordinating in
marketing themselves
as a group
Perception that
only Big-4 =
global
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©2012 Grant Thornton UK LLP. All rights reserved.
What stops GT from auditing more of the FTSE 350?
Low levels of switching (as referred to by OFT and in Issues statement)
The Big-4 argue:
• high investment by the company and the auditor
• frequent tendering and switching is not necessary for there to be
competition
However:
• the majority of FTSE 350 companies are not sufficiently complex to require
huge investment and set-up cost
• the public sector switches its auditors on a regular basis (e.g. 5 years)
• most privately held companies switch their auditor more regularly, including
large companies with the characteristics of a FTSE 350 company
• most commentators agree that an average of 48 years is much too long for
an auditor to stay in office
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©2012 Grant Thornton UK LLP. All rights reserved.
What stops GT from auditing more of the FTSE 350?
Big-4 reputation
As audits are characterised by a degree of asymmetric information (e.g.
between the audit committee and Finance Director, and between the
shareholders and the company), buyers often choose an auditor on the basis
of reputation and brand, creating a virtuous circle for the Big-4
Four largest firms
conduct the vast
majority of the audits
of large firms in the
UK
Big-4 win more
business from FTSE
350 companies
Big-4 reputation is
reinforced
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©2012 Grant Thornton UK LLP. All rights reserved.
What stops GT from auditing more of the FTSE 350?
Big-4 reputation
• Big-4 have more existing links with Finance Directors and audit
committee chairmen and are therefore more likely to be appointed on
the back of their relationships with FTSE 350 companies
• there is a misplaced perception amongst audit committees that the Big4 are better placed than mid-tier firms to provide information on the
latest developments in international accounting standards
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©2012 Grant Thornton UK LLP. All rights reserved.
What stops GT from auditing more of the FTSE 350?
[Confidential - text redacted]
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©2012 Grant Thornton UK LLP. All rights reserved.
What stops GT from auditing more
of the FTSE 350?
Contractual restrictions
• reputational bias towards the Big-4 is particularly prevalent in unwritten
form, with bankers and other advisors recommending, or in some cases
requiring, that a particular audit firm should be appointed
• Grant Thornton partners encounter restrictions, primarily from a range
of lenders and private equity houses, but we do not track those cases
centrally
• the appointment of a Big-4 auditor is perceived as lower risk in terms of
reputational association
• accepted by Big-4 that these restrictions should be removed
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©2012 Grant Thornton UK LLP. All rights reserved.
What stops GT from auditing more of the FTSE 350?
ISA 600
• ISA 600 sets out the requirements for conducting a group audit
• many companies are led to believe that ISA 600 "requires" the use of
the same auditor for all companies within a group
• this raises a barrier to entry for a secondary auditor to pursue the
statutory audit service for subsidiary companies
• the ability to appoint a different auditor to a subsidiary company would
provide a low cost way of a company to quality test an auditor outside
the Big Four and for that auditor to develop recognition and knowledge
of the business
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©2012 Grant Thornton UK LLP. All rights reserved.
What stops GT from auditing more of the FTSE 350?
Transparency over audit quality
• audit quality is monitored by the AIU
• many investors believe that audit quality is all but "invisible"
• companies have conflicting requirements of their auditor
and so quality metrics are confused with service level
• many AC chairs have concern over "breaking rank" from
using the Big-4
• audit quality likely to increase with more competition
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©2012 Grant Thornton UK LLP. All rights reserved.
What stops GT from auditing more of the FTSE 350?
Non-audit services provision is restricted
• the provision of audit services provides a potential doorway to
being instructed on non-audit services
• companies in the FTSE 350 incurred on average non-audit fees
with their auditor of 80% of their audit fees in the year to April
2011
• 73 FTSE 350 companies paid more to their auditor for non-audit
services than for audit services
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©2012 Grant Thornton UK LLP. All rights reserved.
The supply of audit to FTSE 350 is highly
concentrated
The large listed audit market is ineffective:
•
•
•
•
investors are calling for change / more choice
significant concentration over a sustained period
no material entry by any firm outside the Big 4
real barriers to entry for non Big-4 firms
Choice is restricted for buyers of audit services.
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©2012 Grant Thornton UK LLP. All rights reserved.
Adverse effects of concentration in the FTSE 350
Adverse effect
Evidence
Higher prices and
costs
•
•
•
Oxera and OFT analysis, and LSE report
Large gulf in profit margins between Big-4 and other large
firms
Cost savings when GT has audited on a shared audit basis
Lack of choice
•
•
Audit buyers restricted to 4 firms (less in certain sectors)
Conflicts and regulations further restrict choice
Sub-optimal audit
quality
•
•
Audit quality is comparable between Big-4 and Grant Thornton
Audits over-engineered to meet other management needs
Sub-optimal levels of
innovation
•
Audit market and the auditing profession has not moved
forward as much as might be expected
Auditor concentration has only increased
•
Less competition in
non-auditing markets
•
•
Whilst there is more market penetration by other firms in nonaudit markets, the Big-4 remain significantly the largest
providers
Companies choose incumbent auditor automatically (average
of 80% non-audit fees to audit fees in FTSE 350)
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©2012 Grant Thornton UK LLP. All rights reserved.
Higher prices and costs
•
Oxera found evidence that market concentration and the market share of a
given auditor in a given sector/year both have a statistically significant and
positive impact on audit fees
•
the LSE Enterprise report concluded that there was a direct link between
concentration in the audit market and higher audit fees, specifically in relation to
UK listed companies
•
profit margins of the Big 4 firms are significantly higher than that of the leading
mid-tier audit firms
•
Grant Thornton appointed as auditor to approximately 150 subsidiaries across
25 countries to a FTSE 25 company - leading to a reduction in audit costs for
the UK subsidiaries [confidential - text redacted]
•
most FTSE 350 companies are not more "complex" than many leading private
companies, and so higher prices should not be necessary
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©2012 Grant Thornton UK LLP. All rights reserved.
Lack of choice
• characteristics of the FTSE 350 audit market result in
companies being restricted to 4 in their choice of auditor
• this is amplified in certain specialist sectors (banking,
mining, insurance)
• conflicts of interest (both legal and commercial) restrict
choice
• regulatory and ethical requirements place further
restrictions on auditor acceptance
• a lack of choice reduces competitive alternatives and the
incentive and ability to switch
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©2012 Grant Thornton UK LLP. All rights reserved.
Sub-optimal levels of innovation
• the audit market has not evolved to meet investor needs,
e.g. auditor reporting, assurance on other areas
• concentration has only increased over time
• audit quality remains an opaque measure with the result
that the investor is dissatisfied with the process
• given the current characteristics of the market, a certain
lack of innovation is to be expected as the spur to
innovation through the competitive process is absent
©2012 Grant Thornton UK LLP. All rights reserved.
39
Effective remedies
Effective remedies are those which:
• provide a stable transition
• help to change the behaviour of buyers
• remove barriers to entry
• increase opportunities for more firms
• are effective and capable of UK only implementation
Examples are:
1. abolish
restrictive
covenants
2. more
regular
retendering
in the FTSE
350
©2012 Grant Thornton UK LLP. All rights reserved.
3. further restrict the
provision of nonaudit services by the
auditor to audited
entities in the FTSE
350
4. consortia
audits in the
FTSE 100 using
comply or explain
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Beneficial impacts of intervention
Consider the following scenario:
1.four non Big-4 firms win 3 FTSE 250 audits per
year
2.four non Big-4 firms win 3 FTSE 100 "consortia"
appointments per year (say 25%)
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©2012 Grant Thornton UK LLP. All rights reserved.
Beneficial impacts of intervention
Result after 3 years:
FTSE 100
FTSE 250
Non Big-4 firm penetration now (no. of audits)
1
9
Non Big-4 firm penetration now (%)
1%
4%
Non Big-4 firm penetration after 3 years
45
(no. of audits)
1+3
equivalent
Non Big-4 firm penetration after 3 years (%)
4%
18%
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©2012 Grant Thornton UK LLP. All rights reserved.
Conclusion
• Grant Thornton welcomes the CC inquiry and is
enthusiastic to play our part
• we have the capabilities and ambition to increase our
presence in the FTSE 350
• we have made and are making the investment to be able
to provide audit to the FTSE 350
• the large listed audit market is not working effectively
• Investors and audit customers are calling for more
competition
• well judged intervention by the CC will open up the
market for more firms to compete.
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©2012 Grant Thornton UK LLP. All rights reserved.
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©2012 Grant Thornton UK LLP. All rights reserved.