Mar 4th 2013
By Frank Byrt
The United Kingdom's Competition Commission (UKCC) says that the nation's audit market is dominated by the Big Four accounting firms, which has stanched competition for audit work from public companies to the detriment of their shareholders. The UKCC, in its Statutory Audit Services Market Investigation report released February 22, suggested that among the possible remedies is mandatory rotation of audit firms.
UKCC's report is a major milestone in a sixteen-month probe that was set in motion by a critical report from the House of Lords Economic Affairs Committee in 2011. The UKCC's inquiry focused on Big Four firms KPMG, Deloitte, Ernst & Young, and PricewaterhouseCoopers (PwC).
"Essentially, we identified two clusters of issues," UKCC Audit Investigation Group Chair Laura Carstensen told AccountingWEB UK. "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."
Many of the same issues raised in the UKCC report have been under review by the Public Company Accounting Oversight Board (PCAOB) here in the United States. The PCAOB, formed under the Sarbanes-Oxley Act of 2002, has the issues of auditor independence and audit firm rotation on its standard-setting agenda for review this year after previously collecting comments from interested parties.
The UKCC concluded that Big Four firms hold most of the big company audits and that those organizations rarely change auditors, which hurts the competition for public company audit work and results 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 skeptical of their attempts to present the accounts in the best possible light, the report said.
In the next step in the process, interested parties have until March 21 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, the UKCC said.
An official with at least one of the Big Four accounting firms publicly disagreed with the findings. Richard Sexton, head of reputation and public policy at PwC in the United Kingdom, said in a February 22 press release: "We are very clear that we report to the shareholders and engage with the Audit Committee as their representatives. We believe that the Competition Commission [has] grossly underestimated the critical role that Audit Committees play in protecting the interests of shareholders."