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UK to probe auditors' stranglehold

May 17 2011 15:36 Reuters

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London - UK competition authorities are to probe the stranglehold of the world’s biggest accountancy firms on British blue chip company audits after finding evidence of anticompetitive behaviour.
 
The Office of Fair Trading (OFT) said dominance of the sector by the so-called Big Four threw up barriers for rivals and made it hard for firms to switch auditors.
 
The latest move comes on top of criticism from some policymakers who blame accountancy firms for giving banks a clean bill of health just before they had to be shored up during the financial crisis. Policymakers also worry markets could be destabilised if one of the four went under - repeating the collapse of Arthur Andersen in 2002, which shrank the pool of big auditors from five to four.
 
The European Union’s executive European Commission is set to publish draft legislation later this year to boost competition in the sector. But past efforts to open up the industry have made little headway and critics say global action would be needed for such a small group of companies that span the world.

Market dominance

The auditors - KPMG, Ernst & Young, Deloitte and PricewaterhouseCoopers - check the books of most blue chip companies around the world.

In 2010, the four audited 99 of the companies in the FTSE 100 index. Those companies changed auditors every 48 years on average, according to a parliamentary report in March that called for the sector to be investigated.
 
The OFT said on Tuesday there were reasonable grounds for suspecting features of the market “restrict, distort or prevent competition” in Britain. In some cases, banks will only lend to companies that have been audited by one of the Big Four.
 
The OFT said it would meet with the Big Four in May and June to explore what reforms can be made before deciding on whether to pass the issue to Britain’s Competition Commission. Otherwise, action at the international level could be more beneficial, the OFT said.
 
“The OFT 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,” it said.

London and New York are the top auditing centres in the world and changes may not be effective unless they are transatlantic.

Cooperate
 
Ernst & Young said it backed increasing choice such as reinforcing the audit committee’s role in auditor appointments, removing "Big Four only" restrictive covenants from loan agreements, liberalising audit firm ownership rules, and the creation of a single market for audit services in Europe.
 
PwC said it would actively take part in the round tables. Deloitte said it would support measures to increase competition and “ensure a level playing field”. KPMG had no immediate comment. Accountancy bodies welcomed the OFT statement.
 
“The process the OFT has started today will consult broadly on what remedies can be taken to improve choice in the market,” said Michael Izza, CEO of the ICAEW in London.

“This should include looking at removing any artificial restrictions that merely serve to reinforce the status quo,” Izza said.
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