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May 16, 2011

OFT to consult on audit market concentration

The Office of Fair Trading (OFT) has competition concerns about the UK audit market and will consult audit industry stakeholders on practical remedies to reduce concentration.

The OFT said it has been “concerned for some time that the market for external audit services to large firms in the UK is highly concentrated, with substantial barriers to entry and switching”.

Recently tasked with investigating audit market competition by the UK House of Lords Economic Affairs Committee, the OFT will hold round tables and bilateral discussions with industry stakeholders in May and June.

“We believe that the statutory test for a Competition Commission reference has been met, but are 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 to our concerns,” OFT executive director Clive Maxwell said.

“Our next step is to discuss this with regulators, government, business and the audit industry.”

The provisional decision on whether or not to refer the audit market to the Competition Commission will be subject to a statutory consultation later this year.

The announcement will be viewed as positive for non-Big Four firms who have been calling for market intervention to even the playing field of large listed audit work.

It is conceivable that anti-competitive measures, such as restrictive lending clauses that are biased towards Big Four auditors, could be abolished.

What is unclear is how far the competition watchdog is willing to go to break down Big Four dominance and whether this is in the best interest of capital markets participants.

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