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.