grant thornton uk llp presentation to the competition commission on the market ... · 2014. 3....

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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

©2012 Grant Thornton UK LLP. All rights reserved.

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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


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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Overview of Grant ThorntonGrant Thornton International

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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


Overview of Grant Thornton: Grant Thornton International

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Overview of Grant Thornton: Grant Thornton UK LLP

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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


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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Grant Thornton UK LLP : Credentials

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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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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


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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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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Grant Thornton - investment in large listed market

However…….…..without regulatory stimulus Grant Thornton will continue to be locked-out of the large listed audit market

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Grant Thornton investment in large listed market

International network with member firms in all major overseas jurisdictions

Dedicated large corporates team selling into top FTSE 350 companies Advisory and tax

services sold extensively into FTSE 100

Global audit methodology and IT platform

Responding to tenders in FTSE 350 and successfully auditing FTSE 350 companies

Investment in national technical and regulatory teams to monitor audit quality

Responding to own initiative market tests and research to target FTSE entities

Continued investment in graduate recruitment, new staff, partners and teams


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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Grant Thornton has the capabilities to build presence in the FTSE 350

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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

Full service offering - tax, corporate finance, advisory, recovery, DD, business risk services

Approved by NAO and Audit Commission

Existing positive experience within the FTSE 350 (auditor to 5 FTSE 350 companies)

Auditor to a significant portfolio of large private clients with characteristics of FTSE 350 companies


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)

150% 50% 100%

Good oracceptable

Requiringimprovement

Grant Thornton

0% 50% 100%

Good oracceptable

Requiringimprovement

Big-4


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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Grant Thornton has the capabilities to build presence in the FTSE 350 : FTSE 350 audit provision

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Case study[confidential - text redacted]


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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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.


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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.

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62 companies in this band which GT are presently unlikely to tender for

249 companies in this band -GT have the capabilities to audit companies in these parameters, and already do

39 companies in this band for which GT would tender.


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%) 21


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


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Grant Thornton has been more successful in penetrating private companies

Largest 2,070 private company audits (equivalent to main + AIM market)


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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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What stops GT from auditing more of the FTSE 350?

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Big 4 reputation

Contractual restrictions over auditor appointment

Institutional bias in favour of Big-4

Lack of transparency over audit quality

Use of incumbent auditor for non-audit services

"IBM factor" on the part of audit committees

Big-4 behaviour -coordinating in marketing themselves as a group

Misunderstanding of ISA 600

Perception that only Big-4 = global

Low levels of switching & tendering



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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Big-4 reputationAs 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

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Four largest firms conduct the vast majority of the audits of large firms in the UK

Big-4 reputation is reinforced

Big-4 win more business from FTSE 350 companies



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 Big-4 are better placed than mid-tier firms to provide information on the latest developments in international accounting standards

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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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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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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 competition33



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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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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Adverse effects of concentration in the FTSE 350Adverse 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 non-audit 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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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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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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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

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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:

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1. abolish restrictive covenants

3. further restrict the provision of non-audit services by the auditor to audited entities in the FTSE 350

2. more regular retendering in the FTSE 350

4. consortia audits in the FTSE 100 using comply or explain


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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Beneficial impacts of intervention

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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 (no. of audits)

1 + 3 equivalent

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Non Big-4 firm penetration after 3 years (%) 4% 18%


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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grant thornton uk llp presentation to the competition commission on the market ... · 2014. 3....

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