Bloomberg News

Big Four Auditor Dominance Hurts Quality, Regulator Says

February 22, 2013

The Big Four accounting firms’ dominance over corporate audits in Britain will probably lead to higher prices and lower quality, and prevent clients from meeting shareholders’ demands, a regulator said.

The situation makes it difficult to compare prices and switch providers -- 31 percent of the U.K.’s 100 biggest publicly traded companies have used the same accounting firm for the past two decades, the Competition Commission said today in provisional findings from a 16-month probe of the industry.

“Too often auditors’ focus is on meeting the needs of senior management who are key decision takers on whether to retain their services,” the Competition Commission said. “This means that competition focuses on factors that are not aligned with shareholder demand.”

The inquiry focused on KPMG LLP, Deloitte LLP, Ernst & Young LLP and PricewaterhouseCoopers LLP, the same companies at the center of a similar European Union effort to increase competition in the industry. A U.K. government committee investigating the global financial crisis had called for the probe of the four accounting firms, which earned 99 percent of the audit fees paid by the FTSE 100 companies in 2010.

The U.K. commission said it’s considering possible remedies including requiring companies to seek public bids from auditors on a regular basis, mandatory rotation of which ones are hired, and banning “Big-Four only” clauses in loan documents. The watchdog may also seek to boost the accountability of audit committees and increase engagement between auditors and shareholders, it said.

‘Grossly Underestimated’

The Competition Commission said it will issue a final report by Oct. 20.

All four companies challenged aspects of the regulator’s findings in e-mailed statements.

Richard Sexton, the head of public policy at PwC, said the Competition Commission had “grossly underestimated” the role that audit committees play in protecting shareholders’ interests. Hywel Ball, the head of assurance at Ernst & Young in the U.K. and Ireland, said the watchdog hadn’t found any “excess profits” or collusion between firms.

“We don’t believe the evidence supports the contention that current market conditions have led to unnecessarily higher prices, lower quality or less innovation,” said David Barnes, a managing partner at Deloitte U.K. “We categorically disagree that auditors typically place the interests of management over shareholders,” according to the Deloitte statement.

“We believe that audit quality and competition in the U.K. is strong,” Simon Collins, chairman of KPMG in Britain, said in a statement. “We fully recognize our duty to shareholders and the absolute importance of our independence.”

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

To contact the editor responsible for this story: Christopher Scinta at cscinta@bloomberg.net


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