Danny McCance 29 Mar 2018 11:52am

Grant Thornton takes a bow from FTSE 350 audit market

The UK’s fifth largest accountancy firm has announced its strategic decision to withdraw from auditing FTSE 350 companies due to the “competitive landscape”

Robert Hannah, COO of the firm, explained that the firm is a market leader and one of the biggest AIM auditors, but said that it only audits a small number of clients in the FTSE 350 and that “it continues to be extremely difficult to penetrate this market in its current form”.

Hannah said that as a result of the current climate, the firm had “taken the strategic decision to move away from tendering for statutory audit work in the FTSE 350”.

The firm stated that it would continue like this until it saw a “shift in the competitive landscape that would level the playing field for competing in this market”.

“We will continue to serve our existing FTSE 350 clients and will focus on delivering and growing our non-audit services for this market, with our primary audit focus being in other growth segments,” Hannah added.

As well as its six FTSE 350 clients, Grant Thornton will carry on auditing companies outside the FTSE 350 and other public interest entities (PIEs).

The firm’s head of audit, Sue Almond, said that the firm is invited regularly to tender for audits and it turns a number of them down. “Your starting point with anything like this is ‘What’s the likelihood at all of any kind of change and what’s the relationship we already have with people?'. If you are in a position, even just on paper, where it doesn’t look like there’s a prospect of success, then we would decline anyway.

“It’s fair to say that we’ve been involved in quite a number of tenders but we don’t feel that we’re getting the success and the output for the amount of time and effort that is going in. You’ve only got to look at the stats to see that these jobs going out for tender are simply moving around the Big Four.”

Grant Thornton has won just two FTSE 350 tenders since the Audit Directive introduced mandatory tendering and rotation of auditors in June 2016. The intention was to introduce more competition into the top end of the audit market but, despite the changes, the Big Four continue to audit 97% of the market.

Although the firm is not giving up auditing PIEs completely, its decision has come at a time when many of the firms registered to audit PIEs are questioning whether it is worth their while to continue. Not only have their margins been squeezed but they generally have to accept unlimited liability and they have to undergo an additional raft of heavy duty monitoring from the Financial Reporting Council (FRC).

Over the 18 months since June 2016, the number of audit firms registered for PIE audits has fallen from around 50 to 34, with more expected to deregister in coming months. And they are not small firms - top 10 firm Smith & Williamson is one of those that have decided to pull out of the market.

All this comes at a time when serious questions are being asked about the dominance of the Big Four in the audit market.

Following the high-profile collapse of construction and services company Carillion at the beginning of the year, FRC chief executive Stephen Haddrill suggested the Big Four be dismantled to enhance competition in the sector.

This view, echoed by Lib Dem leader Sir Vince Cable, was dismissed by ICAEW which called instead for an investigation into the reasons why other audit firms aren’t scaling up to compete with the Big Four.

Commenting on Grant Thornton's decision, Robert Hodgkinson, ICAEW executive director, technical, said that the firm was raising some fresh issues around market structure at the top end of PIE audits.

"Our broader concern is how to address concentration in the PIE market as a whole. It has become clear that the ratio of risk to reward increasingly means that mid-size firms no longer want to take on PIE audits. Changing that is not going to be simple and will involve many factors including liability, fee structures and proportionate regulatory oversight.

“Unless and until we can make the PIE audit market attractive to more firms, it is highly unlikely we will be able to deal with any of the present concerns. But the answer is to make it more appealing to other players, not harder for the ones already there.”

Last month, senior audit figures from Deloitte and KPMG told MPs investigating Carillion that the market for FTSE 100 audits was still highly competitative.