‘Big 4 only’ audit clauses outlawed: what’s the impact on your agency contracts?

In April 2014 legislation was approved by the EU Parliament and adopted by the Council of the European Union to make the audit market in the EU more competitive. Key measures are that Public Interest Entities (PIEs) will have to change the audit firms that review their year end accounts at prescribed intervals and the market is to be opened up to firms other than the ‘Big 4’ (PricewaterhouseCoopers, Deloitte, KPMG and Ernst & Young). As a result ‘Big 4 only’ audit clauses in commercial contracts (often loan agreements) that force companies to use one of the Big 4 firms for their year end statutory audit are now “null and void” i.e. completely unenforceable.

Why has the law changed?

There were a number of reasons for introducing the legislation including restoring investors’ confidence in the financial statements of quoted companies, discouraging anti-competitive practices in the choice of auditor, increasing transparency and reducing the possibility of auditor independence being compromised.

More information is available via this link to the press release issued by the European Parliament.

Should your hands be tied in your choice of auditor?

Clients of agencies that are part of the big groups are coming to us increasingly frequently asking about the wording of the audit clauses in their agency contracts.

It seems that more than one of the big groups has a “group policy” that the only contract compliance auditors they will accept are the Big 4 accountancy firms. When clients push back on this, they are told that the agency is not empowered to agree to anything else.

It strikes us as very odd that an agency should want to dictate the audit firms that a client can use to review the agency’s management of its money. At best the agencies appear to be seeking to load the dice in their favour and, at worst, they appear to be encouraging potential conflicts of interest and anti-competitive business practices. It’s a classic case of the tail wagging the dog.

Surely you as the client should have free rein to choose an independent auditor?

It’s your money that the agency is being given to manage. You are appointing an independent auditor to check on your behalf that the agency has done everything it committed to do. You are paying the auditor a fixed fee to provide the service.

As long as the auditor is professionally qualified, competent to do the work and working within the regulatory regime of a professional accountancy body (such as the ICAEW or AICPA), the client should be able to choose whomsoever it wishes to conduct the audit.

Do the Big 4 really offer value for money?

Regardless of the precedent set for statutory audits, one question we would ask a brand is “why would you want to only be entitled to use a Big 4 firm to do a contract compliance audit of your agency?”. Of course, no-one ever got fired for the equivalent of ‘hiring IBM’. Yet the Big 4 may not be the best folks to use to audit your agencies.

This is for many reasons, but one of them is that their business model sees very green, junior pre- and part-qualified staff doing much of the ‘tick and bash’ work on site, supervised perhaps by more experienced staff from a distance. Is this really what you want to see happening in your most valuable agency relationships at a very sensitive time? When Financial Progression brings a graduate onto an audit project from time to time, their work and key interactions are closely supervised and tightly managed by compliance audit professionals with many years in the business.

Summary

Although our business does not involve us in statutory audits, the EU legislation sets a precedent. We suspect that ‘Big 4 only’ audit clauses may now be difficult to keep or justify in an agency’s contract with its client and that holding company “group policies” in relation to financial audits and contract compliance auditors will need to change in order to stay within the spirit, if not the letter, of the law.