On 21 October, the OFT announced that it had referred to the Competition Commission the market for the supply of statutory audit services to large companies in the UK. The OFT can make such a reference when it has reasonable grounds for suspecting that any feature, or combination of features, of a market in the UK prevents, restricts or distorts competition.
There are only four large players in the audit market (Deloitte, Ernst & Young, KPMG and PwC), who between them, it is estimated, earned nearly 99% of all the audit fees paid by FTSE 100 companies in 2010, amounting to nearly £600 million.
The OFT has been monitoring the "Big Four" and the accountancy and audit market since November 2002 and has been concerned for some time about the high costs of switching between auditors. The OFT found that the average annual switching rate among FTSE 100 companies was 2.3%. It noted that there are substantial barriers to entry and switching, in terms of gaining relevant experience, establishing a reputation, surmounting regulatory barriers and banking requirements, taking on liability risks, and raising capital to finance expansion. Non-"Big Four" firms face the additional hurdle of accessing networks of auditors in foreign countries.
In making its decision to refer, the OFT was mindful of the fact that there was a widespread perception that it was necessary to improve competition in this market. The OFT also took into account the fact the European Commission is preparing draft legislation that will apply to the audit industry across the EU.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
