Banks now form part of the Britain’s top ten businesses. Their market capitalisation runs into billions of pounds. However, there has always been a suspicion that they have not been very strategic about their expansion or making best use of their resources. Many sought to join in the 1980s house market speculation by buying into estate agencies and sundries. By venturing into areas with little synergy, many banks got their fingers burnt.
Now the banks face new challenges. Their traditional jurisdictions are being challenged by new players. BMW is the latest player to enter the banking scene. Major challenges have already been mounted by Tesco, Sainsburys and other direct line bankers. Traditional banks are reputed to be losing some 3,000 accounts a week to these new players. The reaction of the banks has been to retreat into their traditional shells, close bank branches, sack staff and make excuses. They continue to neglect markets which would enable them to make good use of their High Street sites.
Is there any economic and moral reason for denying banks and similar organisations an entry into the lucrative auditing market? More than a million organisations are required to hire an accountant/auditor for auditing and related services. The UK accounting and auditing market is estimated to worth some £7.5 billion a year. Much of this market is guaranteed by the state e.g. the Companies Act 1985 which requires around 600,000 limited liability companies to submit to an external audit. A host of other organisation ranging from schools, universities, hospitals and charities are also required to have statutory audits. This market is almost exclusively dominated by accountants. Around half of it is dominated by just five major accountancy firms - Coopers & Lybrand, Arthur Andersen, Ernst & Young, KPMG, Deloittes & Touche and PriceWaterhouseCoopers. These firms have already entered into all kinds of markets ranging from consultancy, advice on taxation, information systems, investigations, business planning, advice on pensions etc.. Some firms are even reputed to be arranging printing T-shirts and badges for their clients. They are also heavily involved in the sale of financial services. This has enabled them to earn UK fees of some £3.5 billion a year. Their world-wide income is estimated to be around US$51 billion. The Big-Five are in the process of mounting a further assault on the financial sector. In comparison, the traditional UK banks have been timid. They have the High Street sites to enable them to compete with all comers, but have shown little desire to enter new markets. Perhaps, banks are not really capable of competing with accountants. Most banks have made substantial investment in developing expertise on internal auditing, spotting moneylaundering, developing systems of internal controls, forensic accounting and investigations. It cannot be beyond them to market these services or sell them to anyone else.
Historically, accountants have entered other people’s markets and territories to expand their fee income. But the financial services sector is now showing willingness to enter the markets traditionally left to accountants to develop multi-disciplinary businesses. Some banks might consider entering the market afresh. Others have recognised the value of a brand name and have bought out accountancy firms. In the USA, American Express has spent some $500 million to buy-out medium size accountancy firms to give itself a head start. This is now being followed by other financial services conglomerates. International Alliance Services Inc (soon to change its name to Century Business Services Inc) is the latest to embark on an aggressive policy of acquiring accountancy firms. This gives them a springboard for selling all kinds of services. A similar pattern is now beginning to emerge in Scandinavian countries and in continental Europe.
Entering the accountancy and consultancy market is relatively easy. The market is not specifically regulated by any specific legislation or regulator. There are no major barriers to prevent banks from entering this market. Banks already have the High Street presence. Brand names in the shape of accountancy firms can be acquired. Are the UK banks willing to join their international counterparts and compete with accountants by developing one-stop financial shopping for their clients?
The external auditing market is regulated by the Companies Act 1989. Under this, the auditing markets is reserved for members of accountancy trade associations, such as the Institute of Chartered Accountants in England & Wales (ICAEW), the Institute of Chartered Accountants of Scotland (ICAS), the Institute of Chartered Accountants in Ireland (ICAI) and the Association of Chartered Certified Accountants (ACCA). The original recognition of these qualifications was given in 1948. There is no reason why in the age of global businesses, information technology and demands for real-time audit, such a decision should not be reviewed. Individuals with other qualifications can lay claim to appropriate expertise and knowledge. In principle, there is no reason why banks and other financial services companies cannot employ suitably qualified individuals and enter the auditing market. There is no reason why others holding alternative qualifications cannot perform audit work.
Following the Companies Act 1989, the above accountancy trade associations also act as regulators for the auditing market. They licence auditors and monitor their work. In its 1997 Business Manifesto, Labour Party gave a commitment to introduce ‘independent regulation’ of all auditing firms. Even if it had not, there is nothing to prevent banks from either registering with the current regulators, developing suitable organisational structures and enter the auditing market. Some banks would object to being regulated by accountancy trade associations. There is nothing to prevent banks from urging the government to create new independent regulatory bodies (e.g. along the lines of the Financial Services Agency) to regulate the auditing market. A window of opportunity now exists as calls for 'independent regulation' are bound to get louder. The ‘new’ regulator could be specifically required to ensure that the auditing market is open to a variety of new players. In this ‘open’ market, banks and other organisations could play a valuable role. There is no logical reason for reserving the auditing market to accountants only.
Banks could build their credentials on ability o handle a whole variety
of businesses as they must already be making various assessments of business
risks. As a condition of entering the audit market, banks could also set
new standards. Unlike current auditors who have compromised their independence
by selling auditing and non-auditing services to their audit clients, the
banks could insist that they will not sell non-auditing services to their
audit clients. It cannot be beyond them to develop suitable structures
to ensure that conflicts of interests are avoided. By entering the accounting
and auditing markets, banks would also be in a better position to monitor
the affairs of the borrowing businesses and hence their risks. Rather than
retreating into their timid shells, the UK banks need to look at the emerging
strategic scenarios and new market opportunities. Their US and European
competitors certainly have. The alternatives are stagnation and sub-optimal
use of their High Street presence.