On Fire: Market Dominance of Big Four in Banking Sector

Lucas Gilmore, “Big 4″ observer
March 28, 2011 /

Not only questions about the role of auditors in the 2008 economic crisis are being hurled against the Big Four audit firms but also their concentration in the banking sector.

This is the new scenario in the latest development of the investigation into how Deloitte, PricewaterhouseCoopers, KPMG and Ernst & Young discharged their duties in the lead up to the economic crisis that severely hit the financial and banking sector more than two years ago.

The Office of Fair Trading in UK is underway towards conducting a probe into the lack of competition in the audit industry before and after the economic crisis. Investigations by authorities will focus on the restrictive bank clause widely used by the banking sector that left customers filing for loans with no other options but to tap the services of Big Four audit firms alone.

The Financial Times reported that approximately nine out of ten borrowers are being audited by any of the Big Four firms, on which British Bankers’ Association chief Angela Knight denied any knowledge.

Although he has been hearing complaints from smaller audit firms about the uneven competition in the audit industry, Deloitte senior partner Martyn Jones downplayed the announcement of the investigation and said his firm is open to the removal of the restrictive bank clause.

The same open arms are what Ernst & Young and PricewaterhouseCoopers have gestured towards the imminent probe.

Additionally, the report by the House of Lords Economic Affairs Committee ready to be published this week is expected to damn the Big Four firms following their initial investigation in November last year.

Market dominance of the Big Four in the banking sector is especially noticeable in the portion of auditing fees paid by FTSE 100 members to auditors where 99.9 percent go to any of PricewaterhouseCoopers, Deloitte, Ernst & Young and KPMG, while the scanty 0.01 percent go to firms outside the Big Four.

It can be recalled that the Big Four audit firms previously made a firm stand defending themselves as having clean hands in anything that has injured investors when the banking sector collapsed.

The Lords report is expected to largely tackle the “going concern” clause used by auditors to indicate a bank’s ability to meet liabilities. This clause has been used by auditors as if there was nothing else to do to help the banks evade a much greater risk as claimed by the Big Four firms.

In doing so, the auditors were confident enough that the banking sector could weather drastic effects of the economic crisis on the alleged promise made by the government to bail out injured companies.

 

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