To Probe or Not to Probe: Fair Trading Agency on Big Four Accounting Firms’ Market Share

Michelle Remo, “Big 4″ observer
May 06, 2011 /

The Office of Fair Trading (OFT) in London has said that this month will see its decision whether to push through with the plan of conducting an inquiry into the bank clause that destroys the competition among accounting firms.

The investigation will particularly grill the Big Four accounting firms that are enjoying 99 percent of market share in every 100 largest U.K. companies according to a report released by the U.K. House of Lords in March.

Market dominance of the Big Four has become the focus of financial regulators following the 2008 global financial crisis, with the Economic Affairs Committee of the House of Lords having grilled the accounting firms in a November 2010 inquiry for not sounding the alarm when the banking sector was in the verge of collapse.

After the accounting firms washed their hands of the crisis, Lord Lawson said it was “astonishing” to hear that there was no need for the auditors to sound the alarm about it because of the support from the taxpayers.

KPMG revealed in December last year that Lord Myners gave them the assurance that the government would continue its bail-out for the companies that could still be saved from failing.

However, in his speech before the economic affairs committee of Britain’s upper house of parliament, Myners contradicted claims of the Big Four that the government gave them reassurance to help the troubled banks, which prompted them to hand out unqualified endorsements to the banks’ accounts in the lead-up to the financial meltdown.

Meanwhile, the fair trading regulator will look into whether the market dominance of Big Four did put some restraints in the choice of U.K. firms for auditors.

Market dominance of the Big Four in the banking sector can be seen 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 a scanty 0.01 percent goes to firms outside the Big Four.

The issue is anchored on a 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.

The OFT will seek whether the clause is unfairly favoring Deloitte LLP, Ernst & Young LLP, PricewaterhouseCoopers LLP and KPMG LLP. Later this month, the fair trading office will decide on whether to set about an inquiry according to OFT spokeswoman Kasia Reardon.

The Big Four accounting firms have expressed their willingness to cooperate with the probe.

Sarah Jurado, Ernst & Young spokeswoman for London, said her firm is open to the inquiry, as is Deloitte and PwC, that confirmed in their respective statements their openness to an investigation into the restrictive bank clause.

The OFT is also urged by the government to look into the limits on non-audit firms that own shares in auditing firms and whether smaller accounting firms are deterred to take on large companies due to their liabilities.

Euan Burrows, lawyer with Ashurst LLP in London, told Bloomberg news that the probe will likely end with a referral to the Competition Commission, Britain’s “second phase” antitrust regulator, which has the power to ban the restrictive bank clause.

 

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