Audit – a global market requires global thinking

The OFT has finally dared to lift the lid on the UK's audit market to peer inside what is likely to be a Pandora's box of complex issues.

But regardless of the conclusions it reaches about any over-concentration or anti-competitive features, it is hard to see what the OFT or Competition Commission (CC) will be able to do about it.

In May 2011 the OFT took the unusual step of announcing, without having first conducted a market study, its provisional conclusion that there were sufficient competition concerns in the audit market to warrant a reference to the CC for an in-depth market investigation. The OFT is conducting a series of roundtable and bilateral discussions with interested parties before formally consulting on the decision of whether (or not) to make a market investigation reference.

In March this year the House of Lords Economic Affairs Committee published its "Report on Auditors: Market concentration and their role". It called for "a detailed investigation of the large-firm audit market by the Office of Fair Trading, with a view to an inquiry by the Competition Commission so that all the interrelated issues surrounding concentration, competition and choice can be thoroughly examined in depth and in the round". The OFT recognises, however, that to embark on this course of action would be futile without having sought to consider what, if any, remedies are available.

Attempting to apply a narrow UK solution would, arguably, be doomed to failure from the outset. The most draconian measure available to the CC would be a structural break-up of the UK operations of the Big 4. Commentators note that breaking up the Big 4 may increase choice in the UK audit market, but it is hard to see what compulsion would be on listed companies to use the newly created entities or other pre-existing rival firms. Given the increasingly international flavour of UK listed companies, a great majority might simply choose to remain with their international (hence existing) auditor of choice. Others consider action is required to break what they see as the unfair and anti-competitive 'audit grip' of the Big 4, not just in Europe but globally.

Whatever the answers to the perceived problem in the UK, it is clear that this represents but the tip of the iceberg. Perhaps attention should now shift to the European Commission's review, which, in theory, carries with it the possibility of at least a pan-European conclusion or remedy.

You can read our longer article on this issue in this month's Accountancy Update.