OFT: Frightening future for Big Four?

THE OFFICE OF FAIR TRADING is considering a referral to the Competition Commission but its lukewarm language might indicate faltering commitment to its decision to review the audit market.

London South Bank University professor Andrew Chambers, specialist advisor to the House of Lords inquiry that recommended an OFT inquiry, said: “It’s the wording that worries me; they sound like they’re casting doubt on whether there’s a solution to be found before they’ve started looking.”

If the commission is called in, forced break-up of the Big Four is a distant yet feasible outcome; the body has the power to order structural change and it is currently waiting for the nod to start the investigation.

The OFT announced it had “provisionally decided” that problems exist that could warrant referral to the Competition Commission. “However, it is now to discuss with interested bodies whether, in practice, potential remedies exist that could allow the commission to resolve these problems,” the office said.

Its conclusion will be revealed later in the year and the decision hinges on whether or not “there is a reasonable chance that appropriate remedies will be available to the Competition Commission”.

Consultations will take place with selected parties, and an OFT spokeswoman said the terms were deliberately left vague in order to ensure an “open and transparent process that does not accidentally exclude anyone”.

The office confirmed that the Big Four, the institutes and business groups will be approached and said the watchdog expects to be contacted by other interested parties.

Chief among these will doubtless be second-tier firms, which have long pushed for access to FTSE 250 audits. Richard Bint, senior partner at PKF, went one step further, saying the Big Four audit around 80% of the FTSE small-capitalisation companies and that a level playing field should be created in every tier.

The decision to refer the problem to the commission hinges upon the outcome of the OFT’s preliminary investigation. The OFT is looking for evidence of features in the market that prevent, restrict or distort competition, which could take the form of collusion or abuse of position.

Angus Johnston, lecturer in competition law at Oxford University, said it can be tough to prove collective dominance.: “Without contact evidence, it’s difficult to show enough connectivity between the firms, and you can’t accuse them of collusion.”

In these circumstances, the OFT could ask the commission to take a closer look. However, it has already questioned if the competition authority has the right tools in its arsenal to tackle the problem.

Rather than worrying about whether the right tools exist, it might be fear of the commission’s “appropriate remedies” making the OFT hesitate. The commission has the power to order structural change and could call for the forced divestment of assets, as in the recent case of airport group BAA.

“If the commission orders the Big Four to split, the OFT might be worried about how it would design such a remedy. With such large and multi-faceted companies, the solution might be disproportionate to the damage caused,” said Johnston.

The third option would be to bypass the commission and ask the government to legislate. Firms would be very unhappy with wholesale regulation, preferring to find market-led solutions; this option could result in large-scale legislation like that governing the energy sector and financial services.

However, a direct referral to legislators could still be preferable for the Big Four, despite the fact that, ostensibly, it seems the most serious outcome. The government might be more susceptible to lobbying over the potentially damaging effect of regulation on the UK economy, whereas the commission might retain a degree of independence that would make it hard for the firms to shift conclusions in their favour.

OFT representatives will be speaking with interested parties in the coming months and will then consult on their findings. A decision is unlikely before the end of the year and stakeholders face a tense period of watching and waiting for a conclusion with potentially nuclear implications.