Competition Commission Probing Audit Market

Jack Humphrey, Regulatory journalist
October 31, 2011 /

The OFT has referred the market for the supply of statutory audit services to large companies in the UK to the Competition Commission (CC) for further investigation.

The decision to make a market investigation reference follows a public consultation which closed in September.

The OFT has been concerned for some time that the audit market is highly concentrated, with low levels of switching and substantial barriers to entry.

On May 17, 2011, the OFT announced that it had provisionally decided that the competition issues that it had identified in the audit market passed the statutory test for referral to the Competition Commission, but that it wanted to discuss with interested bodies whether potential remedies would be available before reaching a decision on whether to exercise its discretion to refer.

On July 27, 2011 the OFT reached a provisional decision to refer the audit market to the CC, and opened a public consultation.

In 2010, the four largest firms – PwC, KPMG, Deloitte and Ernst & Young – earned 99 per cent of audit fees paid by FTSE 100 companies. Between 2002 and 2010, the average annual switching rate among FTSE 100 companies was only 2.3 per cent.

Before provisionally deciding to refer the market to the CC, the OFT held a number of meetings with audit service providers, customers and regulatory bodies. One of the issues considered by the OFT during these meetings was the potential for overlap with parallel work ongoing at a European level.

However, the nature, content and timing of EU legislation are not settled and the OFT believes that there are a number of important inputs that the CC might make during the legislative process. The OFT also believes that a CC inquiry has the potential to address UK-specific competition concerns that may not be within the scope of the EU’s work.

John Fingleton, OFT Chief Executive, said: “The market for large company audits lacks sufficient competition and does not work well for customers. It is highly concentrated, largely supplied by four big firms, with clients rarely switching between auditors. There are also high barriers to entry for new and smaller competitors. These are not the indicators of a competitive market.

“Voluntary and industry-led efforts to increase competition and choice in this market have proved unsuccessful. Following extensive consultation, we have concluded that a reference to the Competition Commission is appropriate. We believe that such an inquiry will also complement the EU’s legislative process.”

The CC must reach its decisions and publish its report within a maximum of two years although, where appropriate, the CC will aim to complete investigations in 18 months or less.

 

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