Big Four branded an 'oligopoly' as Lords call for OFT inquiry

THE HOUSE OF LORDS has described the position of the Big Four firms as an “oligopoly” and called for an investigation by the Office of Fair Trading, and possibly even the involvement of the Competition Commission, to increase competition in the market for big company audits.

The economic affairs committee’s report on auditors concludes that the OFT needs to look at banking covenants that restrict companies to Big Four auditors; the unlimited liability of auditors; limits on ownership of audit firms and, critically, the expansion of audit to cover risk management and client business models.

The report also recommends mandatory retendering of audits for FTSE350 companies, with a non Big Four firm invited to tender.

Privately however the Lords believe the expansion of audit responsibilities could be the way to encourage more competition.

On audit committees the report recommends they should publish reports covering significant financial reporting issues and the basis for tendering and choice of auditor. Audit committees are also called on to hold regular meetings with major shareholders.

However, the report rejects calls for mandatory auditor rotation, joint audit or limits to the number of big public company audits any one firm can hold.

Committee chairman Lord MacGregor (pictured above) said in a statement: “Our inquiry has revealed widespread concerns about the Big Four’s dominance and the risk that they could become the Big Three.

“Our report makes several recommendations to reduce this dominance but we feel that this market concentration is of such significance that a thorough review of the issues by the Office of Fair Trading and possibly the Competition Commission is now overdue.”

The Lords report criticises the industry regulator, the Financial Reporting Council and the business minister Ed Davey for falling short in their efforts to deal with the competition issue.

“The last set of recommendations from the Financial Reporting Council’s Market Participants Group in 2007 lacked teeth. It has had no effect in lessening the dominance of the Big Four,” said the Lords report.

The Lords concluded that proposals from the business minister would achieve no more than the FRC has already failed to achieve.

“We were disappointed that the minister is not more ambitious. We would expect exactly the same result for the measures he advocated to our committee as the FRC’s measures have had,” said the report, and added, “they do not add up to a policy of creating greater competition and choice, of altering the current oligopolistic situation, or of addressing the risks of the Big Four coming down to a Big Three.”

(Picture shows Lord MacGregor, chairman of the Lords economic affairs committee unveiling the report ©Iain Winfield/Incisve Media)