Key Points:

Audit is once again a hot topic, thanks to the widening world recession and some weighty research that has regulators twitching.

The global recession has exacerbated concerns that the Big Four (Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers) could become the Big Three. There are also fears among regulators that the already high degree of market concentration could mean even higher fees, as well as consequences for audit quality.

The defining point for much of the accounting world on this subject was the 2006 report on competition in the UK audit market by Oxera, one of Europe's foremost independent economics consultancies. Oxera was deeply concerned that the Big Four audited all but one of the FTSE 100 companies and represented 99 per cent of audit fees in the FTSE 350.

The report pointed out that the concentration in the audit market became more marked after the merger between Price Waterhouse and Coopers & Lybrand in 1998, and the dissolution of Arthur Andersen in 2002; events that brought the Big Six down to the Big Four. In addition, companies under audit compounded this concentration through a lack of competitive tendering and consequently low switching rates.

As one of only six global audit and accounting practices, we believe that increasing competition and choice in the audit market must be aligned with the concurrent aim of improving audit quality. One size cannot fit all. To improve audit quality, companies need to be able to choose audit firms based on their appropriate size and experience.

Oxera's report demonstrated there is a structural problem with choice in the market place. Virtually all interviewees felt the market would be improved by greater choice. Moreover, many share owners and audit committees were alarmed at the vulnerability of the UK capital markets due to this lack of choice - concerns that, we believe, are replicated in many other jurisdictions. In the case of the UK, the Financial Reporting Council, the independent regulator

responsible for promoting confidence in corporate reporting and governance, has produced a consultation paper downstream from the Oxera report with a view to finding answers.

Many companies have been discouraged from changing their auditor out of fear of an adverse reaction from investors. The Oxera report suggested the the problem was perception rather than fact.

The perception that the highest audit quality is found only in the four largest firms has been compounded by lack of awareness in the market about what we see as "right sizing".

Companies should select the right size and type of audit firm - too small and the firm will not necessarily be sufficiently resourced or robust in its procedures; too large and the firm may not pay sufficient attention to audit quality and high levels of service for its smaller clients.

There is probably no quick fix for the enhancement of competition and choice in the audit market. The answer most likely lies in market-led solutions rather than such drastic steps as breaking up one or more of the big firms, which has been suggested in the UK.

But certainly a useful starting point is to improve understanding and awareness of the issue of wider choice by creating greater dialogue between investors, boards and audit firms.

* Chris Dixon is a senior partner with Grant Thornton in Auckland.