Update: The Competition Commission concluded that the domination of Big Four accountancy firms has an adverse effect on competition in the market for listed company audits.
The long-awaited provisional findings into the audit market was released at 7am on Friday 22 February and concluded that the lack of effective competition encourages corporate auditors to focus more on the interests of the managers who appoint them than the shareholders they are supposed to serve.
"Essentially we identified two clusters of issues," audit investigation chairman Laura Carstensen told AccountingWEB. "The first was 'stickiness' and propensity of companies not to switch auditors and adverse issues that can result. And the second was to make sure auditors are more squarely aligned with what shareholders want." [Register and log in to see further comments from Carstensen in the full version of this article.]
1. Mandatory tendering2. Mandatory rotation of audit firm3. Expanded remit and/or more frequent audit quality reviews4. Prohibit ‘Big Four only’ clauses in loan documentation5. Strengthen accountability to the audit committee 6. Better shareholder-auditor engagement; and7. Extended reporting requirements.
Source: Competition Commission remedy notice
After poring over research documents, surveys and evidence from its own enquiries, the investigation team concluded that Big Four firms hold most of the big company audits, and that these organisations rarely change auditors.
These factors constitute an adverse effect on competition for listed company audit work, resulting in in higher prices, lower quality and less innovation and differentiation than would be the case in a more open market.
The lack of competition creates a risk of auditors being insufficiently independent from executives and insufficiently sceptical of their attempts to present the accounts in the best possible light.
Interested parties have until 21 March to submit their comments and alternative suggestions to the investigation. These responses will be collected and digested over the summer, with the final deadline for deciding any statutory action set for October 2013.
About John Stokdyk
John Stokdyk is the global editor of AccountingWEB UK and AccountingWEB.com.