25th November 2009:

‘Big 4 only’ Clauses

In my blog posting on 8 September I once again expressed the view that 'Big 4 only' clauses in bank and other financing agreements should be banned.  I stated then:

'I have always been nervous about suggesting intervention in a free market but I do not believe that the outlawing of 'Big 4 only' clauses is a major intervention and, in my view, it is no different to other interventions to ensure there is adequate choice and competition in the market place.'

These are views that I have been expressing for some years, although many have questioned the prevalence of such clauses and indeed some have sought to deny their existence.  

It was comforting therefore for me to read in the report published by the UK's Financial Reporting Council in October 2009 entitled 'Choice in the UK Audit Market' that reference was made to restrictions in loan covenants.  The report from the FRC noted:

'..it is too early to determine how widespread such obligations are; however, the FRC continues to receive examples of banks imposing loan covenants with 'Big 4 only' clauses, including one which imposed a higher rate of interest if the borrowing company chose a non-Big 4 auditor.'

Surely there is now sufficient evidence to recognise that such clauses are a potential constraint on choice in the market place and regulators should be urged to ban them.  Interestingly, I am increasingly seeing evidence that this is an issue in a significant number of countries in many continents in the world.  If governments and the regulatory authorities are genuine in their wish to promote choice in the market place then they need to address this issue as a matter of urgency.

 Global Accounting  2 Comments November 25th, 2009