Contrary to claims made earlier to the Competition Commission
(CC) in its investigation into audit market concentration, a survey
by the watchdog has found that most of the UK’s FTSE350 companies
do not have lending agreements in place which stipulate auditing by
Big Four firms.

The survey, carried out by academics on the behalf of the CC,
concluded that “Big Four only” clauses, which mid-tier firms had
suggested as a major potential barrier to entry to the audit
market, are not as commonplace as first thought.

Loan Market Association (LMA) documentation is
widely used as the basis for lending agreements. Of the two main
types of LMA documentation, investment grade and leveraged, only
the leveraged documentation contains a clause stipulating a Big
Four auditors as part of its template.

Data from ten UK banks showed that FTSE 350
companies mainly had investment grade agreements in place, which do
not contain Big Four only clauses.

Nevertheless, the report warned that although
there have been few changes in policy over the last five years, any
move by the LMA to include such clauses in investment grade
documentation would create a systemic change, potentially making
such clauses almost universal.

Nine of the ten responding banks said they did
not require borrowers to change auditor. All of the banks said they
could not identify any circumstances where a borrower or a
borrower’s auditor had asked for an auditor clause to be inserted
in a lending agreement.

One of the banks said that in states outside
the European Economic Area, practicing banks may require the use of
“international auditors”. However, this is not relevant to the FTSE
350 companies that are the main focus of the CC’s current

HSBC noted that in its experience, borrowers
entering into large leveraged financed transactions will typically
already have appointed a Big Four firm.

The CC also approached rating agencies, which
said auditor identity potentially affects ratings analysis, and
that auditor switching per se seemingly has little impact on

Big Four only clauses have been widely
criticized in the UK House of Lords audit market investigation
report, which prompted the CC inquiry, on the basis that such
agreements pose a great barrier to entry for large mid-tier