Office of Fair Trading decision follows House of Lords Economic Affairs Committee report on the audit market
UPDATE 1 August 2011: The OFT made a further announcement on 29 July 2011 bringing a referral of the statutory audit market to the Competition Commission one step closer.
The Office of Fair Trading (the OFT) today announced that it “has provisionally decided that there are competition problems in the audit market that pass the statutory test for referral to the Competition Commission”. The OFT announcement can be read here.
This announcement follows the publication of the House of Lords Economic Affairs Committee’s report (the Report) on “Auditors: market concentration and their role” on 30 March 2011. The Report can be accessed here. The Report concluded that the large-firm audit market (meaning Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers) in the UK is “clearly an oligopoly with all the attendant concerns about competition, choice, quality, and conflict of interest” , and recommended that the OFT should conduct an investigation of the large-firm audit market with a view to an inquiry by the Competition Commission (the Commission).
We covered the contents of the Report in this post.
Detail from the OFT announcement
The OFT announcement continues that:
“However, it [the OFT] is now to discuss with interested bodies whether, in practice, potential remedies exist that could allow the Commission to resolve these [competition in the audit market] problems.
The OFT has been concerned for some time that the market for external audit services to large firms in the UK is highly concentrated, with substantial barriers to entry and switching.
Having considered a wide range of evidence, much of it reflected in the House of Lords Economic Affairs Select Committee’s recent report on audit, the OFT has now reached the provisional view that there are reasonable grounds for suspecting that there are features of the market that restrict, distort or prevent competition in the UK.”
The OFT will now decide whether or not to refer the audit market to the Commission. A key consideration will be whether appropriate remedies are actually available to the Commission. The OFT announcement continues that “to consider these issues further, the OFT will therefore be conducting a number of roundtables and bilateral discussions with selected parties in May and June”.
The provisional decision on whether or not to refer the audit market to the Commission will be subject to a statutory consultation later in 2011.
Financial Reporting Council reaction and European Commission work on auditors
The Financial Reporting Council (the FRC) welcomed the OFT announcement and stated its view that the issue is better dealt with by the competition authorities rather than by audit regulators. The FRC statement is here.
In addition to its work enforcing accounting and audit standards, the FRC has ongoing workstreams on various aspects of auditors and their work; see the summary at the end of this post.
Today’s OFT announcement also refers to the need to assess the relative benefits of action on audit market problems at international or UK level. This is a reference to the ongoing work by the European Commission on audit policy; in October 2010 the European Commission produced a green paper on “Audit Policy: Lessons from the Crisis”, which can be read here (and a summary of responses to that green paper is here).
UPDATE 21 June 2011: As we discuss in this post, the Government has responded to the House of Lords Economic Affairs Committee’s Report and has welcomed the OFT’s announcement.
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