Big audit firms await UK judgment

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The "Big Four" accounting firms should find out this week how their grip on Britain's audit market could be loosened in a ruling Europe and the United States will scrutinise.

The UK Competition Commission launched its probe into the audit market for the country's 350 top listed firms in 2011 but has delayed its preliminary findings twice to this month. It said it was hoping to make an announcement this week.

Britain's market mirrors the global sector with just four companies – KPMG, PwC, Ernst & Young and Deloitte – checking the books of 90% of UK listed blue chips.

The probe was partly prompted by a House of Lords inquiry which found that listed companies, which must have their annual reports signed off by an auditor, use the same accountant for an average of 48 years, a figure the Big Four dispute.

The fear is that auditors become less sceptical over time about what clients tell them. Policymakers were also angered that accountants gave banks a clean bill of health just before taxpayers had to rescue them in the 2007-09 financial crisis.

The Big Four's audit and advisory income easily outstrips rivals: PwC had UK revenues of €2.9 billion last year, with Deloitte at 2.4 billion, KPMG €2 billion, and E&Y at 1.7 billion, according to Competition Commission figures.

'Virtuous circle'

So far the watchdog has found no evidence of collusion among the Big Four but says they enjoy a "virtuous circle" of deep experience, making it harder for rivals to break in. Many chairs of company audit committees are former Big Four employees.

The Big Four insist competition is fierce, pointing to downward pressure on fees, but the UK probe has sparked public sniping between the big and small accounting companies.

"When reaching its provisional findings, the Competition Commission should recognise that the large company audit market currently produces competitive outcomes for large companies and investors," PwC said. Ernst & Young, KPMG and Deloitte said they would comment once the findings had been published.

The Big Four question why rivals should be given regulatory help to increase market share and note that many big clients doubt if the smaller firms could build up expertise fast enough.

Smaller accountants say that without public intervention, there is no point spending huge sums to expand their networks.

Britain's audit policeman, the Financial Reporting Council, now requires companies to consider changing auditors at least every decade but smaller auditors want tougher measures.

These would include mandatory rotation of auditors every few years, or joint audits, where a smaller firm teams up with one of the Big Four, at extra cost to customers.

The watchdog could put forward incentives for switching auditors rather than more radical, mandatory requirements.

The European Union's approval of a draft law to inject more competition into the sector has slowed in recent weeks so there is time to take stock of the UK findings.

The draft law proposes mandatory switching or rotation of auditors every six years and even a market share cap. The US audit watchdog has aired plans for auditor rotation as well.

The European Commission tabled a draft regulation in November 2011, requiring that audit firms rotate their work regularly and spin off consultancy work, measures that would favour smaller audit outfits.

>> Read: Commission braced for battle with big audit firms

The European Union adopted a directive in 2006 which aimed to restore confidence in capital markets by strengthening the quality and independence of auditing of company accounts.

The directive came in the aftermath of international accounting scandals involving US firm Enron and which brought to collapse one of the top global auditing firms, Arthur Andersen.

In 2008, Brussels reviewed for the first time the auditing directive. But immediately after the entry into force of the new rules, and on the wake of the US subprime crisis, the Commission started a new review of the sector which ended up in December 2010 with the collection of responses to a wide public consultation aimed at changing again the key piece of EU legislation on auditing.

  • March 2013: UK Competition Commission set to publish results of probe into the Big Four auditing firms
  • 2013: Ongoing consideration of Commission proposals to update rules on auditing

European Commission

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