The UK Office of Fair Trading (OFT) has referred the issue of audit market concentration and lack of competition to the Competition Commission for further investigation.
The OFT said it has been concerned for some time that the audit market is highly concentrated, “with low levels of switching and substantial barriers to entry”.
The OFT said it has 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 Competition Commission might make during the legislative process,” the OFT said.
OFT chief executive John Fingleton 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,” Fingleton said.
The OFT was tasked with investigating audit market competition by the UK House of Lords Economic Affairs Committee in September.
The Competition Commission is required to report on its findings by 20 October 2013, although the body said it will aim to complete the investigation in a shorter period.
Big Four supportive of investigation
The Big Four who are to be most affected by the Competition Commissions investigation said they believe there is fair competition in the market, however they are supportive of OFT’s decision and will fully co-operate with the investigation.
PwC UK board member for reputation and policy Richard Sexton said the firm sees this market investigation, “as an opportunity to show that this is a fair and competitive market”.
“It will be important for the Commission to listen to the views of business through the course of this market investigation and to take account of the potential unintended consequences of any intervention, particularly where they could impair audit quality, add costs and complexity to business, and damage the competitiveness of the UK economy, particularly in these most challenging of times,” Sexton said.
Deloitte UK chief executive and senior partner David Sproul said the firm is supportive of measures that enhance the quality and value of audits. “However we believe the audit market is highly competitive and is an important contributor to UK growth,” he said.
KPMG said it also welcomes the inquiry, “to bring to a head the long running arguments and discussions over the structure of the UK audit market”. “We believe that there is already effective competition and pricing in the UK audit market,” the Big Four firm added.