Regulator tries to ease Big Four's grip on major audits

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Accounting regulator the Financial Reporting Council is attempting to open up the audit market since almost all London's top 300 quoted companies are audited by PricewaterhouseCoopers, Deloitte, KPMG and Ernst & Young, which earn hundred of millions of pounds a year from the assignments.

In a consultation paper, the regulator is proposing that companies' audit committees, usually made up of three or four non-executive directors, provide "information relevant to the auditor selection decision".

More contentiously, it is proposing the audit committee "disclose any contractual obligations to appoint certain types of audit firms".

The single biggest hurdle to smaller firms winning big audit contracts is the fact that many City banks insist companies hire a Big Four auditor as a "comfort" when they are making loans.

Such contracts implicitly suggest that banks believe that either Big Four audits are more reliable or that a Big Four firm is easier to sue in the event of things going wrong.

The FRC is keen to open up the audit market and break the stranglehold of the four major firms because it fears the consequence of one of the Big Four quitting the market - either through choice because of the threat of litigation, or spiralling insurance costs, or forcefully as in the demise of Arthur Andersen following its auditing of the scandal-hit Enron.

The regulator hopes that major companies will look outside the Big Four but has admitted the current structure of the market offers little incentive to switch.