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November 22, 2011

UK Big Four vigorously defend competition levels

KPMG, PwC, Ernst & Young and Deloitte have said the current competition levels in the UK statutory audit market are sufficient and reflective of client needs, according to their initial submission to the Competition Commission (CC).

The Big Four firms dismissed Office of Fair Trading (OFT) claims that low rates of tendering and switching are a sign of competition not work well in the audit industry.

KPMG UK said in its response that competition in the audit industry, “as in other professional services industries differs from, for example, competition in the supply of consumable goods”.

“The level of switching arises because audit firms are incentivised to make and maintain relationship-specific investments in order to meet customer needs and to respond to the competitive pressures in the industry,” KPMG said in its letter.

PwC said it fundamentally disagrees with the OFT that market share is indicative of problems with competition.

“The audits of large companies require certain attributes which only the largest auditors are capable of providing,” PwC said.

Deloitte said there are a number of capabilities that FTSE350 clients or potential clients require of their auditor.

“Our significant investment in developing these capabilities has been completely responsive of client demand. We were there for surprised by the OFT’s suggestion that such capabilities are barriers to entry,” Deloitte said.

The only mid-tier firm to respond to the CC so far, Grant Thornton UK, disagreed with its market leading competitors by telling the CC there is significant concentration in the market.

“The high level of concentration amongst the four largest providers of audit services to large companies in the UK has persisted for a significant period of time. Grant Thornton and the other suppliers of audit services have been unable to break the stranglehold that the four largest suppliers of audit services have on the market,” Grant Thornton said.

The mid-tier firm also called for the abolition of restrictive covenants or the so called Big Four only clauses. Only E&Y acknowledged the existence of such documents in their response to the CC and said that removing Big Four only restrictive covenants would increase choice as well as several other measures such as reinforcing the audit committee’s role in auditor appointments, publication of independent inspection results for all listed company audit firms, liberalising audit firm ownership rules and the creation of a single market for audit services in Europe.

E&Y also suggested the CC carefully inspects the role of the buyer, “in order to avoid unintended consequences – including threatening audit quality”.

The OFT referred the issue of audit market concentration and lack of competition to the CC for further investigation in October 2011, following the UK House of Lords Economic Affairs Committee audit market competition inquiry recommendation.

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.

Related articles:

OFT refers audit market to the Competition Commission

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