The Competition Commission’s Investigation into the UK statutory audit market

The Competition Commission’s investigation into the market for audit services is reaching a critical phase as it holds hearings on its Provisional Findings and Remedies Notice with various parties and moves towards publishing its final report, due in September 2013.

“The importance of the investigation cannot be overstated given its relevance to discussions around the world, and in Europe in particular, and the fact that remedies will reflect an eighteen month market analysis. The UK outcome will doubtless be looked at closely by others.

“It is therefore important that the issues raised by the investigation are properly understood and that all stakeholders contribute to the debate. That includes us being very clear where we stand.

“We have some serious reservations about the process so far but nevertheless believe that changes could and should be made to further underpin audit quality, improve transparency and reinforce competition.”

Richard Sexton, head of reputation and policy

In the Provisional Findings the CC asserts that auditors “compete to satisfy management rather than shareholder demand” and that there are “significant, persistent and widespread concerns regarding the quality of audits”. We don't believe this is the case.  

In summary we should:

  • strengthen the accountability of the auditor to the audit committee,
  • enhance communication between shareholders, auditors, and audit committees,
  • put a greater focus on examining and reporting audit quality; and
  • remove any artificial barriers impeding competition.

However, we strongly oppose mandatory firm rotation and short term mandatory tendering because these measures would disenfranchise shareholders.

Related content

How does the UK audit market operate?

This short animation illustrates how the UK audit market for large companies works in practice, describing some of the key characteristics of competition in the supply of audits.

 

View transcript

The UK audit market has been the subject of much comment recently. At first glance it may appear static and the audits of FTSE350 companies overly concentrated. The four largest audit firms dominate, holding relatively stable market shares and companies appear to be passive, tendering and switching audit firm infrequently.

But this isn’t the reality. In fact, there are four simple truths.

Large companies demand large audit firms. Over time, companies have grown, becoming ever-more globalised and sophisticated. Together with increasingly complex international regulation, this makes it important for audit firms to have global reach; deep sector experience and consistent methodologies. As a result, most companies decide that they need a large firm to audit them.

Competition between audit firms is intense as they strive to succeed in a market that is more dynamic than it can first appear. In a market where firms strive for growth, audit appointments are a zero-sum game. Each win is also a loss to a competitor. Indeed, audit firms need to win and retain clients just to maintain market share.

Added to this, the composition of the FTSE350 changes more frequently than you might think. In fact, nearly 700 companies have at some stage been listed in the past 10 years.

Auditors change as well. Over the past decade, FTSE350 companies have decided to switch their auditor more than 130 times. That’s more than one a month.

Companies in the FTSE350 are among the most effective purchasers in the world. Auditors are appointed by shareholders for a period of one year. The process is overseen by experienced and well-informed boards and audit committees. They recognise the importance of a high quality audit to their own business.

The appointment process is more transparent and heavily scrutinised than for most other professional services and companies are able to obtain what they require through the threat of tender. All of this results in a highly competitive audit market in which quality is high and prices are competitive.

As the changes over the past 10 years have shown, the audit market for FTSE350 companies is much more dynamic and competition for audits much fiercer than it would first appear. Above all capital markets are able to function effectively as a result of the trust that is created by the audit.

The UK statutory audit market

We have developed this animation to demonstrate just how dynamic the FTSE 350 audit market has been over the last 11 years.