UK parliament to probe market concentration
By The Accountant
27 July 2010
An inquiry into the dominance of the UK audit
market by the Big Four accounting firms has been launched by
the House of Lords Economic Affairs Committee.
Lords Economic Affairs Committee chairman John
MacGregor said the auditing industry is currently dominated by a
“very small number of players” and the inquiry would look at ways
to promote greater competition.
PricewaterhouseCoopers (PwC) and KPMG have
both welcomed the inquiry.
“The issue of market concentration is one that
has been around and touched on for a long time but it will be good
to have a real debate so we can demonstrate the level of
competition that actually exists in the market place,” PwC public
policy and regulatory affairs head Pauline Wallace said.
Wallace told The Accountant PwC does
not feel it operates in an uncompetitive market place.
“It is right to think the Big Four have the
FTSE 100 audit market and that is largely because these are global
companies who have chosen auditors who have global networks and
this is all a matter of choice. Nobody forces anybody to come to
PwC or KPMG or any of the other firms,” she added.
Wallace said the FTSE 250 is a very different
market place.
“If you look at the FTSE 250, there is a much
greater spread of audit firms and we compete with all sorts of
people at that level. Some people choose to come to PwC but not
everybody does and I think that demonstrates that there is quite a
competitive market place out there. I would be surprised if you
looked below the FTSE 100 and saw the same concentration of four
firms,” Wallace said.
“I think [the inquiry] needs to focus on what
it is the Big Four dominates if it does truly dominate.”
The inquiry plans to establish whether the
dominance of PwC, Deloitte, KPMG and Ernst & Young in the audit
market contributed towards a failure to pick up unsustainable risks
banks were taking leading up to the global financial crisis.
Wallace said the same question could be asked
of regulators or bank management.
“I think we are part of the whole process of
detection but we are not the only ones,”
Wallace said, adding that the disclosure of
risk before the financial crisis was not as good as it should have
been.
“If you pick up a financial statement you’ll
find there is stuff all over the place about risk. It is not in one
place, so even just simply pulling it together in one place would
improve the quality of the information that is provided and ensure
there is consistency. If management was willing to contract us to
do it we could also provide greater assurance around risk, which is
also worth looking at.”
Wallace said firms could provide additional
assurance if investors wanted it but companies would incur further
costs so a cost benefit analysis would have to be done.
The committee will also look at whether market
concentration affects the quality of audited accounts as if there
are conflicts of interest between auditing and business consultancy
services provided by the Big Four.
Wallace doesn’t think there are conflicts of
interest because most of PwC’s consultancy work is provided to
entities other than its audit clients.
“There are some types of consultancy work that
you would not provide to your audit clients because there would be
independency issues,” Wallace noted.
“We run a business and businesses do need
investment so we do need to ensure we have the ability to generate
revenue through different services that we can then reinvest in the
things that matter such as audit quality.”
This is not the first nor is it likely to be
the last time audit market concentration has been in the spotlight
but all previous attempts to improve choice have yielded little
results.
Last month, the UK Financial Reporting Council
said audit concentration is a major concern for the watchdog more
than two-and-a-half years after its market participants group
issued recommendations to increase audit choice.
Evidence sought
As part of the inquiry, the committee has
requested written evidence on the following:
- How has auditing come to be dominated by four
global firms? Should more competition be introduced? And if so
how?
- Does a lack of competition lead to excessive
fees being charged?
- Were auditors sufficiently sceptical when
auditing banks in the run up to the financial crises in 2008? Could
they have done anything to mitigate the crises? Can auditors now
contribute to better regulation of banks?
- Do conflicts of interest arise between audit
and consultancy roles? How can these be avoided or mitigated?
- Should the role of internal auditors be
enhanced and how should they interact with external auditors?
The deadline for evidence is 24
September.
Related articles
FRC says audit concentration remains a risk
Audit concentration remains a concern for UK watchdog
Report calls for continued monitoring of audit market
concentration
FRC keeps an eye on consulting growth
Related links
The House of Lords
Economic Affairs Committee