You may have seen a report in International Accounting Bulletin yesterday drawing attention to findings from Paul Gillis, a visiting professor of accounting at Peking University’s Guanghua School of Management.
Paul discovered a Big Four only lending clause in a loan agreement issued by the state owned China Development Bank (CDB) to Harbin Electric as part of a privatisation proposal.
The smallprint of the loan facility agreement stated:
No Group Member may replace the Auditors, unless the new auditor to be appointed is any of Deloitte & Touche, PricewaterhouseCoopers, Ernst & Young and KPMG.
It is examples like this from a state owned bank in a major global market that demonstrate just how prevalent these clauses actually are.
The dangers of audit concentration are well documented. The significant disruption that would occur in the event of one of the leading players leaving the market unexpectedly – a scenario that is all too familiar following the Enron scandal less than ten years ago – is clear, but moreover in the interests of a fair and open market, examples like this CDB clause need to be consigned to our profession’s history.
At a European level we are pleased to see scrutiny of such matters led by Commissioner Barnier and as you can see from my post earlier this year on Challenging Audit Market Dominance we are actively involved along with others of our peers in encouraging Europe’s legislators to recognise these issues and take action.
Any such legislation needs to prohibit contractual clauses and any other institutional bias in favour of the four dominant firms. But it is clear this is not a problem confined to European borders, and authorities globally need to pay attention.