The Competition Commission (CC) has suggested
there is no evidence of tacit cooperation among the Big Four in the
initial conclusions of its audit market investigation.

The Commission found that while “conditions
conducive of tacit coordination” seem to exist in the market for
auditing FTSE 350 companies, it does “not currently have the
further evidence necessary to establish that there has been tacit

Such conducive conditions, the commission
said, can result from business similarities, which may be
reinforced by “audit and accounting standards and other regulatory

The Commission noted certain characteristics,
such as stable market shares, not all Big Four firms being present
in certain industries, and infrequent switching and tendering of
auditing contracts, could be a result of collusion.

However, the initial conclusion was that tacit
coordination was more likely with regard to sector or geographical
area – which “would arise if firms choose not to compete for
certain customers or if they decide not to enter the audit market
in specific sectors” – than with regard to pricing.

The CC received submissions from all of the
Big Four firms, as well as from mid-tier firms Grant Thornton (GT)
and BDO. GT argued that a highly concentrated market, easy fee
comparisons, stable demand and significant barriers to market entry
all facilitated coordination.

The Big Four countered that each audit fee was
a bespoke service, with a tailored price, and that fees disclosed
related to previous financial years. They also highlighted that
audit firms differed materially and that market share had not been
stable but had varied as businesses had grown and changed.

The Big Four also said “that they had a strong
incentive to compete to win tenders when these happened” and that
“there was no evidence of tacit coordination”.

While the mid-tier firms said lack of Big Four
present across all markets “meant that in certain
sectors/industries there were even fewer rivals to monitor”, the
Big Four said this only held true for “a small number of sectors”
and that “all the largest firms were capable of making a
competitive offer in all market segments.”

The report highlighted the fact that between
2002 and 2010, 90% of all FTSE 350 companies were audited by the
Big Four. However it also stressed that the movement of businesses
in and out of the FTSE 350 meant there were 542 companies listed on
the index between 2006 and 2011.

In data shown to the commission, PwC showed
more than 130 instances of FTSE 350 companies switching auditor in
the 11 years to the end of 2011, with 11 moving from mid-tier to
Big Four firms, and only four moving the other way.

The full report is due in November. In its
overall initial view, the Commission stated that while it currently
has no evidence of tacit collaboration, it would change its
position if it was “to identify information that could be evidence
of tacit coordination (or of any mechanisms in place to enhance the
possibility of coordination).”