UK Competition Commission Criticises Big Four Accountants

Competition in the UK audit market is restricted by factors that make it hard for companies to switch accountants, according to a preliminary report of an investigation by UK watchdog the Competition Commission.

The Commission, which began its review in 2011, also found that there is a tendency for auditors to give priority to satisfying management rather than shareholder needs.

The ‘Big Four’ accounting firms of Ernst & Young (E&Y), Deloitte, KPMG and PwC, which audit around 90% of UK listed companies, were criticised for “higher prices, lower quality and less innovation” because of a lack of competition.

The Commission reported that 31% of the UK’s top 100 companies and one in five of the next 250 firms had had the same auditor for over 20 years.

The Commission found no evidence of collusion between the Big Four, but commented that they were “insufficiently independent from executive management and insufficiently sceptical in carrying out audits”.

“We have found that there can be benefits to companies and their shareholders from switching auditors but too often senior management at large companies are inclined to stick with what they know,” said Laura Carstensen, who chaired the Commission’s audit probe.

Claims Rejected

In response, the Big Four maintained that there is strong competition and cited downward pressure on fees and some recent switching of auditors by major companies.

PwC said its audits clearly report to shareholders and that the Commission has “grossly underestimated” the critical role the audit committees at clients play in protecting shareholder interests. E&Y said it was pleased the review had found no evidence of collusion, abuses or excess profits but rejected accusations that the audit market was not serving shareholders.

The report was welcomed by the Financial Reporting Council (FRC), the UK’s independent regulator for corporate reporting and governance. “The FRC called for a thorough investigation by the competition authorities and welcomes [the] preliminary report. We look forward to assessing it and working with the Commission further,” said its chief executive officer, Stephen Haddrill.

“In particular we are pleased to see that the Commission is exploring measures to enhance competiveness and switching including regular audit retendering, strengthening the work of audit committees and a prohibition of Big Four-only clauses in loan provisions.  The FRC introduced enhanced audit committee reporting, and retendering into the Corporate Governance Code last year, taking the view that retendering secured the benefits of mandatory rotation without its significant risks. 

“We also welcome the Commission’s recognition of the value of our audit quality reviews, and look forward to discussion of whether there should be more transparency of their findings and an increase in their scope. The UK has already seen the benefits of being more open than other countries.”

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