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Saturday Feature
 
Call for disclosure of audit firm safeguards
Barney Jopson from London
7/29/2006
 

          Companies should have to disclose their contingency plans in case their audit firms are put out of business, say corporate governance experts.
Governance for Owners, a leading British activist group, raised the idea recently in response to an official consultation on the dominance of the big four audit firms.
The Financial Reporting Council (FRC), the audit regulator, is concerned about how the financial system would cope if the demise of Andersen were repeated and one of the top firms failed.
Governance for Owners suggested that the Combined Code, the governance guidelines, should require companies to summarise contingency plans in audit committee reports, which are published with their annual accounts.
Experts say many listed companies, particularly the smaller ones, have given little thought to the consequences of their auditors being disabled by a criminal indictment, negligence lawsuit or regulatory sanctions.
The big four -- PwC, Deloitte, KPMG and Ernst & Young -- audit all but one of the FTSE 100 companies and 97 per cent of the FTSE 250. Watchdogs were reminded of the risks from the big four's stranglehold in May when the Japanese authorities suspended PwC for two months, throwing the accountancy profession and large companies into turmoil.
KPMG's US business last year narrowly escaped being indicted by the US Department of Justice over its sale of tax avoidance schemes.
Concentration in the audit market has left some companies feeling they lack an acceptable choice of alternative auditors.
There are related concerns, for which no definitive evidence has been produced, that the big four's dominance has enabled them to push audit fees unreasonably high and at the same time encouraged complacency in their work.
Governance for Owners conceded there was no "magic bullet" to solve the problems but it suggested shareholders be required to vote on audit reports, as they do on remuneration committee reports, to reinforce the link between investors and audit committees and that audit fees for group accounts and subsidiaries be reported separately.

 

 
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