Competition Competition opens public inquiry and will conduct comprehensive investigation of the Big Four auditors
Following its work this year on the dominant position in the supply of audit services to large firms held by the Big Four auditors (Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers), the Office of Fair Trading has today confirmed that it is referring:
“the market for the supply of statutory audit services to large companies in the UK to the Competition Commission for further investigation”.
The OFT referral is here and its collection of questions and answers in connection with the referral is here.
By “large firms”, the OFT means large listed companies. In 2010 the Big Four firms received 99% of the audit fees paid by FTSE 100 companies and audited all but one of the FTSE 100 companies. The OFT referral follows a highly critical report on the large-firm audit market by the House of Lords Economic Affairs Committee, which described the market as:
“clearly an oligopoly with all the attendant concerns about competition, choice, quality, and conflict of interest”.
We discussed the House of Lords report in this post of March 2011, and our posts on the OFT’s work are here.
Reasons for the referral to the Competition Commission
In summarising the reasons for the referral, the OFT states that it “considers that the audit market for large companies in the UK is highly concentrated, with substantial barriers to entry and switching”. The OFT regards the large-firm audit market has having the following features:
- “There is little incentive for companies to switch auditor.
- It can be costly for companies to switch auditor.
- The market shows low levels of tendering and switching.
- In choosing an auditor, companies focus on existing size or reputation, which imposes a barrier to entry to non-Big Four auditors.
- Larger auditors possess certain attributes necessary for auditing large companies.
- Smaller auditors can find it difficult to raise capital for expansion.
- Banks may impose conditions requiring the use of a Big Four auditor in their dealings with companies of a certain size.
- The market exhibits high concentration.
- Companies may have further limits on the choice of auditors that the can appoint.”
Competition Commission investigation
The Competition Commission (CC) will now conduct a detailed public inquiry of the large-firm audit market, and can require relevant parties to submit evidence. The CC is required to report by 20 October 2013, although it states that it will aim to complete the investigation in a shorter period.
Concurrent audit market investigation by the European Commission
The European Commission is expected to publish a green paper on reforming the EU audit market in November 2011. That paper is expected to recommend measures designed to address encourage the entry of other firms into the large-firm audit market – such as joint audits, mandatory rotation of auditors and some form of prohibition on audit firms providing advisory and consultancy services to their audit clients.
There is an obvious potential overlap between the CC investigation and the European Commission’s work. The OFT explains why it has nonetheless gone ahead with the referral to the CC as follows:
“The OFT considers that there are specific competition concerns about the operation of the market for statutory audit services in the UK that may not be within the scope of the European Commission’s work. The EC could not be expected to resolve in full the OFT’s concerns, or to address any UK specific issues that are not analogous to or replicated in other Member States.
We note that there were a number of consultation responses that spoke of the important role played by the UK as one of the largest audit markets in the world and also as the base of several of the global audit networks.”
There will now be an orgy of lobbying and influencing around the CC investigation by the Big Four audit firms
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