Bloomberg News

‘Big Four’ Accounting Dominance Set for U.K. Antitrust Probe

October 21, 2011

(Updates with lawyer’s comment in seventh paragraph.)

Oct. 21 (Bloomberg) -- The “Big Four” accounting firms’ dominance over corporate audits in Britain will be investigated after an antitrust regulator said the market is bad for customers and small competitors.

The U.K. Office of Fair Trading, which has examined the issue since 2002, referred the matter today to the Competition Commission to find any distortions in the industry and potentially force changes. The probe will focus on KPMG LLP, Deloitte LLP, Ernst & Young LLP and PricewaterhouseCoopers LLP.

“The market for large company audits lacks sufficient competition and does not work well for customers,” John Fingleton, the OFT’s chief executive officer, said in the statement. “It is highly concentrated, largely supplied by four big firms, with clients rarely switching between auditors.”

Large audit firms also face potential European Union restrictions on offering consulting services and may be forced to share work with smaller rivals. The OFT said the U.K. investigation will complement the parallel EU probe and address competition concerns found only in Britain.

“The nature, content and timing of EU legislation are not settled and the OFT believes that there are a number of important inputs that the Competition Commission might make during the legislative process,” the OFT said in the statement.

99 Percent

The Competition Commission will likely demand a significant amount of time and information from the four firms during the probe, and has authority to impose a variety of changes in the industry, said Rosemary Choueka, who leads the EU competition team at the law firm Lawrence Graham LLP in London.

“They could include limiting the duration of audit appointments, or regulating the terms of such appointments, or even requiring the Big Four to divest some of their audit business to other accountancy firms or a new entrant,” Choueka said.

A U.K. government committee investigating the global financial crisis earlier called for a probe of the Big Four, which earned 99 percent of audit fees paid by the 100 largest U.K. companies last year, according to the OFT. The watchdog made a provisional finding for the investigation on July 29.

David Sproul, Deloitte U.K.’s chief executive officer, and KPMG spokesman Mark Hamilton said in statements that the U.K. audit market is already competitive and that the companies will cooperate in the probe.

‘Fierce Rivalry’

Richard Sexton, a PwC board member, said there is “fierce rivalry” in the market and that the biggest U.K. companies need the expertise of international audit firms.

Large companies “are sophisticated, demanding and discerning buyers of professional services,” Sexton said in a statement. “Their operations are often complex and international.”

Ernst & Young’s head of assurance for Britain and Ireland, Hywel Ball, said the company supports some measures to increase choice for customers, such as removing “Big Four only” restrictions for audits and liberalising accounting firm ownership rules.

The OFT has said the size of the Big Four’s market share is propelled by the cost of switching auditors, the ease of explaining the choice of accounting firms to investors, the extensive international networks held by bigger auditors and the risk associated with auditing larger companies.

--Editors: Anthony Aarons, Peter Chapman

To contact the reporter on this story: Erik Larson in London at elarson4@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net


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