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Competition body slams audit firms

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MARION DAKERS

THE COMPETITION Commission will this morning find that the Big Four accountancy firms have too much control over the industry, and call for measures to encourage Britains largest companies to change auditor regularly to boost competition.

In its long-awaited provisional report, the commission is expected to find no evidence of collusion, but will raise concerns that PwC, KPMG, Deloitte and Ernst & Young have an unfair grip on the books of big UK companies.

Many blue-chip firms have Big Four-only rules in place, and the commission is set to propose a ban on such measures, according to Sky News.

But it is expected to be less forthright about imposing mandatory rotation, in a move likely to upset mid-sized accountancy firms attempting to crack the FTSE audit market.

The Competition Commission will also urge investors to become more vocal about a firms choice of auditor.

All but a handful of the FTSE 100 use one of the Big Four to audit their accounts, and a firm will keep their auditor for an average of 48 years, according to a House of Lords report in 2011.

At least four blue-chip companies are believed to have put their audit contract out to tender in 2012, but only two asset manager Schroders and oil explorer BG Group decided to switch. Both continue to use the Big Four.

The Competition Commission declined to comment last night.

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St Patrick''s International College

Britain: a case study in low-growth economic mediocrity

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ALLISTER HEATH

BRITAIN is stuck in a rut. No wonder that investors and credit rating agencies are losing patience: the coalition doesnt have the guts or decisiveness needed to jolt the UK out of its present mediocrity, while the opposition is busy dreaming up new taxes, thinks that a slightly looser fiscal policy would transform our prospects and has no real understanding of the extent of our fiscal crisis.

Britains tax receipts confirm that the economy continues to do poorly, albeit not disastrously. So far this fiscal year, receipts from Vat are up 2.2 per cent, less than the rate of inflation. Income and capital gains tax receipts are down 0.2 per cent and corporation taxes are down 8.4 per cent: while in both cases there have been tax cuts (a higher personal allowance and lower corporation tax rates) these dont explain such shockingly bad numbers. Very limited pay rises, a drop in reported income from the highest earners and weak profits are among the answers. National insurance contributions are up a healthier 3.4 per cent, though this not anything worth shouting about.

What all of this suggests is an economy that is either stagnating or growing a little, but by no more than a few tenths of a per cent. At best, the situation looks only marginally rosier than the official GDP figures; at worst, there is no difference. Mediocrity undoubtedly rules OK.

While revenues are poor, any progress the government is making in trimming overall expenditure on wages, benefits and other current spending is being more than cancelled out by increased interest on the growing national debt. During April 2012-January 2013, central government current expenditure hit ?525.7bn, 2.7 per cent higher than in the same period of 2011-12.

Depending on which measure of inflation one uses, real current spending was therefore either up or down slightly. The real cuts are happening in capex, the one area where state spending can be useful for long-term growth (though the private sector, if it were allowed to, could take over many projects). So far this year, central government net investment was minus ?6.4bn with depreciation overwhelming gross investment a massive ?27.7bn lower than in the same period of the previous year. So we are still seeing the wrong kinds of cuts, stagnant growth and weak tax receipts. Unless something drastic changes soon, it is not just credit rating agencies that will be running out of patience with the government.

LOW RETURNS
One of this columns themes is that we are now facing a world of low real returns across financial assets, with high inflation gobbling up nominal gains, and that the bond markets, after years of astonishing returns, are set for a crash. There is lots of evidence to back up this thesis in Barclays latest annual equity-gilt study. The conclusions are stark. Over the next five years, Barclays expects cash to provide negative inflation-adjusted returns of about -1.5 per cent per year (with compounding effects, that means a very sharp drop in value), safe haven government bonds -2 per cent in other words, even worse than cash and equities annual growth of 3-4 per cent. The authors believe that the bull market in government bonds which peaked last year will end in a whimper, rather than in a 1994-style crash. I suspect the authors may be too optimistic, but their case is that a shortage of safe assets, combined with a decision by the authorities to keep the monetary floodgates open, will do the trick. One thing is clear: savers are going to suffer.


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ADDRESS: 24 Great Chapel Street

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POST CODE: W1F 8FS

TELEPHONE NUMBER: 020 74390116

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