This is an audio transcript of the FT News Briefing podcast episode: ‘Big Four maintains stranglehold on UK audits’
Marc Filippino
Good morning from the Financial Times. Today is Friday, December 5th, and this is your FT News Briefing. The Big Four auditors continue to reign supreme in the UK. Plus, higher interest rates in Japan are doing interesting things to currency trades and the bond market. I’m Marc Filippino, and here’s the news you need to start your day.
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Big Four accounting firms continue to dominate the UK’s largest audits. That’s according to the industry watchdog, the Financial Reporting Council. So what does the stranglehold mean for the rest of the market? The FT’s accountancy correspondent Ellesheva Kissin reported on this and joins me now. Hi, Ellesheva.
Ellesheva Kissin
Hi.
Marc Filippino
So this report from the Financial Reporting Council, what did it find?
Ellesheva Kissin
So it found that non-Big Four firms had increased their share of audits for public interest entities by one percentage point, but that’s pretty small for an entire year of effort from the regulator. So the Big Four accounting firms, Deloitte, EY, KPMG and PwC, they’ve maintained a stranglehold on major audits for years. They took 98 per cent, with the fees paid by the FTSE 350 this year. Smaller firms really struggle to break into that market, partly because it’s more hazardous, they’re more difficult, complex audits, and partly because major companies prefer to have the big brand of a Big Four firm doing their audits for them.
Marc Filippino
And why is this a big deal? I mean, they are called the Big Four for a reason, right?
Ellesheva Kissin
Having just four firms do all the major audits for the FTSE 350 is a problem, because when you have too few firms, the issue is what happens if one of those firms goes bust or something happens? There have been efforts by regulators and successive governments to try and change the state of affairs. We’ve seen an audit reform bill from the previous government, in this government, which was trying to introduce more competition into the audit marketplace, and we’ve seen regulators calling for change successively.
Marc Filippino
But based on this report from the Financial Reporting Council, those efforts haven’t worked.
Ellesheva Kissin
Those efforts haven’t worked well, no. The Big Four still keep their share of audits of large listed companies. The only change that we really see year on year is the Big Four shuffling positions within themselves, so KPMG used to be bottom and now EY is bottom in terms of FTSE 350 audit fees.
Marc Filippino
So is there anything these smaller firms can do to drum up more business in the UK or are they always going to be overshadowed by the Big Four?
Ellesheva Kissin
Well, it’s tricky because some of the smaller firms don’t want to do that type of work, because as soon as you engage with more high profile audits, you are opening the door to much more regulatory criticism. Grant Thornton, for example, is a major mid firm in the UK. It cut its number of public interest clients by about 70 per cent, between 2016 and 2022, largely because of that more rigorous supervision.
There’s also the problem that most major clients wouldn’t really look outside of the Big Four for an auditor. HSBC, for example in 2021, it needed to rotate its auditor ’cause there are rules that regulate that type of thing. And it basically had four choices, and it was really difficult to find a new auditor because of conflicts, which meant that HSBC couldn’t easily hire some of the Big Four firms as its auditor if they were doing consulting work for them, so that’s another tricky thing.
Marc Filippino
So it sounds like it’s very unlikely that these types of firms will be anywhere near the Big Four anytime soon?
Ellesheva Kissin
The FRC is trying to coach small firms by reducing the inspections and permissions that they need in order to do so. So you know, the regulator is trying to help them move their way up, but yeah, it doesn’t look likely anytime soon.
Marc Filippino
That’s the FT’s Ellesheva Kissin. Thanks, Ellesheva.
Ellesheva Kissin
Thank you.
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Marc Filippino
US Senators are trying to block sales of advanced Nvidia chips to China. A bipartisan bill introduced in Congress late yesterday looks to make it harder for Beijing to acquire American artificial intelligence technology. The Secure and Feasible Exports Chips Act would block tech giant Nvidia from selling its most advanced Blackwell and H200 chips to China. It would also require the commerce secretary to deny export licenses for advanced chips to China for 2.5 years. One Republican who co-sponsored the bill said that denying China these chips was essential to keep its lead in the artificial intelligence race. The move comes as the White House weighs whether to allow Nvidia to export those H200 chips. US officials say the Trump administration did not plan to enact new export controls on China for the time being.
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Japanese bond yields rose to their highest level since 2007 yesterday. Investors are bracing themselves for an interest rate increase. This is all a reversal of how things used to work in Japan, and it’s looking like the country’s economic normalisation could actually hurt bond markets in the rest of the world. Here to explain why is the FT’s Elettra Ardissino. Hi, Elettra.
Elettra Ardissino
Hi, Marc.
Marc Filippino
So can you give us a sense of what Japan’s economy and monetary policy used to look like and how bond and currency traders behaved as a result?
Elettra Ardissino
Yeah, sure. For many years the Bank of Japan kept short-term interest rates very low and even negative, and so the net effect of that was that bond yields across the yield curve were just very low. That kind of created two different effects. The first was that Japanese institutional investors that need yield income, like pension funds, had to go look for that abroad. And second, investors were also able to start borrowing cheaply in yen and then investing in higher yielding assets abroad. And that is known as the carry trade. And both these dynamics were enabled by the fact that Japan had very low interest rates.
Marc Filippino
All right, let’s break this investor behaviour down into two parts. The ‘yen carry trade’, and domestic bond investor behaviour. Let’s start with the carry trade. How is that changing right now?
Elettra Ardissino
Well, I would say that the carry trade needs a high differential in the cost of borrowing between two different currencies, and so what you’re seeing now is that that’s slightly breaking down. On the BoJ side, governor Kazuo Ueda has recently hinted that the Bank of Japan is on course to deliver another interest rate increase soon, potentially as soon as the December meeting. While on the Fed side, there have been suggestions that the FOMC is on course to deliver an interest rate cut at its December meeting, and so that’s narrowing the rate differential between Japan and the US, and all other things equal, that makes the carry trade less lucrative for traders.
Marc Filippino
And then what about domestic bond investors? What changes could they be making?
Elettra Ardissino
So one other effect of the Bank of Japan’s interest rate increases over the past few years has been that the yield curve has returned to normality in the sense that yields are now higher across the different maturities, and they’re also higher for longer-dated maturities. Now that has led some market participants to posit that domestic investors may be on course to repatriate their capital back home. The thinking goes, no longer need to be in foreign bond markets, they can bring their money back to take advantage of the higher yields domestically. Now, if that happens, that could be potentially a problem for the foreign bond markets that have a big Japanese investor footprint, such as the UK, France and it would increase government’s borrowing costs further.
Marc Filippino
Is there anything that might prevent this from happening?
Elettra Ardissino
Yeah, there’s a couple of reasons why that might not happen, at least immediately. Some Japanese institutional investors have very long asset allocation plans, so to some extent institutional investors’ money is locked in to foreign bond markets for the longer term. There is also another reason: the Takaichi administration’s fiscal plans so far have been a little bit unnerving for markets as a whole. We’ve seen that she intends to increase deficit spending. Japan is a very indebted economy already, and so we’ve seen that the yen has sold off at the same time as yields have increased, and that is a combination of moves that usually tells you that investors are losing confidence in a country’s assets. And so, as far as Japanese domestic investors are concerned, they might be worried if they bring their money back home, they might be exposed to losses if this happens again.
Marc Filippino
Elettra Ardissino is a reporter for the FT’s Monetary Policy Radar. Thanks, Elettra.
Elettra Ardissino
Thank you.
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Marc Filippino
Hope you’re not fed up with US central bank chat after this week, because we’ve got just a little more for you before we go. My colleague, Victoria Craig, who hosts the Monday edition of the briefing is here to preview the week ahead, including the Federal Reserve. Hey, Victoria.
Victoria Craig
Hey, Marc.
Marc Filippino
So if we look at our Fed bingo card, we’ve talked this week about the timing for the announcement of the next Fed chair and Wall Street’s jitters over that frontrunner, Kevin Hassett. What can we cross off next week?
Victoria Craig
Yeah, well, pop the caps off those ink stamps, Marc, because we’ve got the last Fed decision of the year that is on tap Wednesday, and nothing is really certain, but expectations are for another rate cut in December, and that’s despite a persistent lack of data that we’ve talked about lots on the show because of the government shutdown. We did get a little trickle of fresh data this week, and that included weekly jobless claims, which fell to the lowest level in three years. We did also hear from New York Fed President John Williams the week before last, who expressed his support for another rate cut. So that makes a small majority of the Fed’s rate-setting committee that seems ready to move the benchmark rate lower, heading into the new year.
Marc Filippino
The Fed, though, isn’t providing us with the only central bank action next week. What else is lined up Victoria?
Victoria Craig
Yep, that’s right. So in addition to the rate decision here, we also have decisions in Brazil, Canada and in Turkey. And for some bonus content, we’ve got a central banker trifecta at the FT Global Boardroom event next week. The governors of the Banks of Japan and England, as well as the European Central Bank are gonna be in conversation with our colleague Martin Wolf. If any of our listeners are keen to join, you can still register for that event online. Of course, as always, we will pop a link to that in our show notes.
Marc Filippino
Yes, we’ll be watching that with great interest.
Victoria Craig
Overwhelming interest.
Marc Filippino
(Laughter) Thanks, Victoria.
Victoria Craig
Thanks, Marc.
Marc Filippino
You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back next week for the latest business news.
The FT News Briefing was produced this week by Nisha Patel, Victoria Craig, Sonja Hutson and Fiona Symon. I’m your host and editor, Marc Filippino. Our show is mixed by Alex Higgins, Kent Militzer and Kelly Gary. We had help this week from Peter Barber, Michael Lello, Gavin Kallmann and David da Silva. Our acting co-head of audio is Topher Forhecz, and our theme song is by Metaphor Music.