Problems with Audit Market in UK May Reach the Competition Commission, Says OFT
The Office of Fair Trading (OFT) has confirmed that there are reasonable grounds to believe there are problems in the audit market restricting, distorting, or preventing competition in UK.
The OFT‘s provisional view came after considering a wide range of evidence that reflected in the recent report on audit by the House OF Lords Economic Affairs Committee. These competition problems, the OFT continued, qualify for referral to the Competition Commission, meeting the statutory test for reference in Section 131 of the Enterprise Act 2002.
The OFT bared its plan on March 2011 to launch an investigation that will grill the Big Four accounting firms – Deloitte, KPMG, Price Waterhouse Coopers, and Ernst & Young – 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.
At the same time, the Financial Reporting Council (FRC) has welcomed the OFT’s next steps related to the concentration issues in the audit market.
“Having explored ideas for addressing these issues through our Market Participants Group it has become clear to us that the competition authorities are better placed than audit regulators to tackle competition concerns,” said Stephen Haddrill, Chief Executive of the FRC.
The OFT, on the other hand, will first discuss with interested entities whether there are potential remedies that the fair trading body can use to resolve the problems.
The long-standing issue on the concentration of audit market in large firms in the UK has been the major concern of the OFT. The highly concentrated audit market with only four large players, it said, poses “substantial barriers to entry and switching.”
Given the provisional view on Section 131, the fair trading agency is required to decide whether or not to refer the audit market to the Competition Commission after exploring the availability of remedies.
Clive Maxwell, OFT Executive Director, said the OFT believes the audit market problems have met the statutory test for referral to the Competition Commission.
However, the fair trading agency is “keen to understand more about the remedies available in the market and, consequently, whether or not a reference to the Competition Commission would be an appropriate response,” Maxwell added.
Nonetheless, the OFT did not carry out a market study to come up with the view that the concentration problems in the audit market have met the section 131 threshold since it has been reviewing the market for a long time now and the needed information is already available for assessment.
The OFT will assess the relative benefits of action at international or UK level by conducting a number of roundtables and bilateral discussions with selected parties in May and June.