Competition report: audit costs on the rise

The DTI’s Oxera report on competition and choice in the audit market has
found that the dominance of the giant accounting firms has driven up audit costs
from 1995 to 2004.

In the report, Oxera’s consultants said that the ‘limited information’ on the
operating margins of the Big Four indicated that an increase in costs had
contributed to audit fee rises, but added that market concentration had driven
up audit fees.

‘Market concentration and the market share of a given auditor in a given
sector/year both have a statistically significant and positive impact on audit
fees. This result is in line with economic theory and with several other recent
empirical studies – and is separate from the impact of increased costs on audit
fees,’ the report concluded.

Oxera analysed the merger of Price Waterhouse and Coopers & Lybrand, and
found that the ‘PwC merger led to a price increase which could have been in the
order of around 12% from one year to the next – 8% for the market as a whole,
and another 4% for the clients of the merged entity’.

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