Lording it over audit

The House of Lords is about to begin its inquiry into the role of audit in the crisis, and concentration in the audit market. Already there have been calls for the Lords to back major intervention in the audit market.

But will the man in charge, Lord MacGregor, be swayed?

What’s happened?

Last week Grant Thornton probably went further than any previous firm in calling for direct regulatory intervention in the audit market as a means of ending the concentration of top audits in the hands of the Big Four firms.

It was a head-on challenge to the current status quo and it was done in a submission to the House of Lords economic affairs committee that will shortly begin an examination of the audit market.

It was a challenge because it implied that regulators should force a firm like PwC to surrender a hefty part of its audit business to its competitors – not a proposal that will be welcomed by the country’s biggest audit firm but one that Grant Thornton is pushing with a great deal of energy.

Lord MacGregor is the man who will have to consider these arguments along with his fellow members. Which way will he go?

MacGregor is no stranger to contentious issues having served in Margaret Thatcher’s cabinet. MacGregor, with an MA in history and economics, joined the cabinet in 1985 when he was made chief secretary to the Treasury, where he remained for two years and ironically came under pressure to provide more funds by spending departments. He also worked closely with a former PwC senior partner, Anthony Wilson, on developing an efficiency drive.

He then moved on to manage the ministry of agriculture during the BSE crisis for which he received much criticism. Later he was to head the education department and when John Major came to power he was rumoured to be a contender to become chancellor.

However, he was to become transport secretary, possibly his most testing time in government, where he was given the job of privatising British Rail – one of the most controversial privatisations which attracted excoriating criticism. When Labour came to power in 1997 observers speculated that he was a viable caretaker leader for the Tory party.

MacGregor, therefore, is no stranger to difficult subjects and cannot be expected to shirk from bad news for the Big Four whether on concentration or on auditing banks.

Plus, he’ll also have some vigorous backing from Lord Lawson, a member of the committee, a former chancellor of the exchequer, a colleague under Margaret Thatcher and a man with apparently strong views on bank audits.

Last year Lord Lawson joined Lord Tebbit in throwing some serious mud at bank auditors. Lord Tebbit wanted to know why the auditors had remained “out of the firing line” while Lord Lawson demanded to know if the then government was planning to sue the auditors.
Why? Because that’s exactly what he did when, as chancellor in 1984, he ordered that the Bank of England sue Arthur Young for its audit of failed merchant bank Johnson Matthey. The Bank won and Lord Lawson clearly believes that there were parallels to be drawn with circumstances today.

What happens next?

Will some of that rub off on Lord MacGregor? It’s possible. There will be plenty of material to work with.

Put aside the evidence hearings for the moment and you still have the quite vociferous opinions that are being submitted in written form, the most outspoken of which is Grant Thornton’s demand for regulators to get much more active. Indeed, most of all Grant Thornton wants a cap on the number of big audit contracts any one firm can have.

Will their Lordships like that? That’s a difficult call. While there is already some disgruntlement with auditors from Lord Lawson that doesn’t add up to sympathy for market intervention on the scale that Grant Thornton believes is necessary. Remember, MacGregor and Lawson are from the Thatcher years, both have been in the Treasury, both will be pro-markets.

But in this climate it has become apparent that being pro-market doesn’t equal anti-regulation. In a sense, though, being outspoken on regulation is one way of ensuring that the inquiry has influence.

Tame conclusions would probably ensure a report from Lord MacGregor would please the Big Four but be largely ignored. A more strident set of views would get the committee noticed and ironically earn them a more considered hearing.