A House of Lords committee this morning called for the Office of Fair Trading to investigate concentration within the audit market. But is anyone listening?
After listening to months of evidence - including a live appearance by the UK senior partners of the Big Four firms - the House of Lords economic affairs committee published a report concluding that further investigation was needed.
Committee chairman, Lord MacGregor of Pulham Market, commented, “Our inquiry has revealed widespread concerns about the Big Four’s dominance and the risk that they could become the Big Three. Our report makes several recommendations to reduce this dominance but we feel that this market concentration is of such significance that a thorough review of the issues by the Office of Fair Trading and possibly the Competition Commission is now overdue.”
The impact of the global banking collapse and the complete silence of the Big Four accountancy firms about the banks’ liquidity and risk strategies beforehand was one of the driving forces behind the Lords committee hearings.
In their report, published today at 11.15am, the Lords found evidence of “serious failures of communications” that contributed to the financial crisis. The lack of any meetings between bank auditors and the FSA was a “dereliction of duty” by both auditors and regulators, the report concluded. To avoid similar crises in future, the committee recommended a new framework for banking supervision backed by legislation to enforce dialogue between bank auditors and supervisors.
While the Big Four audit firms have a global reach that goes beyond the scope of any national competition authority, the report added that it made sense for the UK to take a lead on the issue because of the accountancy firms’ links to the City of London.
Audit quality within the concentrated marketplace also came under scrutiny, with the report suggesting the need for prudence to be reasserted as the guiding principle of audit.
The Lords lent some support to the view presented in evidence that IFRS allowed banks to prepare financial statements to a lower standard than UK GAAP, particularly in “mark to market” valuations, where they made provision only for incurred and not expected losses. The effect was to overstate profts, leading to excessive distributions and bonuses that would not have occurred under UK GAAP.
Mr Timothy Bush, the Investment Management Association representative on the ASB’s Urgent Issues Task Force told the Lords the UK crash was “a crisis largely caused by accounting”.
Ernst & Young and KPMG, however, argued that the standards governing banks’ loan loss provisions and fair value provisions were not significantly different under UK GAAP and IFRS. Both systems are based on the “incurred loss model”, so that impairment provisons would be based on the prevailing conditions at a given time (the balance sheet date).