British Anti-trust Regulator Decides Audit Market Needs Fixing

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The Big Four accounting firms dominate the British audit market in a way that restricts, distorts, or prevents competition, the country's anti-trust regulator has decided.

The Office of Fair Trading, which reached that conclusion, will now try to agree to voluntary remedies with the firms involved. If talks fail it can refer the case to the Competition Commission, which has the legal power to force changes on the market.

The decision follows a damning Parliamentary report that said “complacency” and “dereliction of duty” on the part of the Big Four audit firms contributed to the financial crisis and told competition regulators to investigate the lack of choice in the market.

In 2010 the Big Four firms audited 99 of the FTSE 100 largest listed companies, which change auditors every 48 years on average.

OFT Executive Director Clive Maxwell said, “We have been concerned for some time about the extent of competition in this market, with only four large players and substantial barriers to entry and switching.”

The Financial Reporting Council regulates audit firms and has tried to encourage greater competition in the market, but with no success.

Its chief executive, Stephen Haddrill, welcomed the OFT announcement. “It has become clear to us that the competition authorities are better placed than audit regulators to tackle competition concerns,” he said.

The OFT would normally conduct a “Market Study” before seeking competition remedies. In this case that initial step was unnecessary, it said, because it had been “keeping this market under review for some time.”

To refer a market to the Competition Commission, the OFT needs to be decide that “there are reasonable grounds for suspecting that there are features of the market that restrict, distort, or prevent competition in the U.K.” This test is set out in Section 131 of the Enterprise Act 2002.

If talks aimed at agreeing voluntary remedies fail, the OFT can only refer the market to the Competition Commission after a period of statutory consultation. That would happen later this year, it said.