'Big Four' auditors get big investigation by the OFT

The OFT suggests the likes of KPMG and Deloitte may be stunting growth in their sector - but is the problem fixable?

by Emma Haslett
Last Updated: 18 May 2011

The Office of Fair Trading has launched an investigation into behaviour by the UK’s ‘big four’ auditors, who it reckons have too much power. The four main audit companies in the UK - KPMG, Deloitte, PricewaterhouseCoopers and Ernst & Young - have a ‘stranglehold’ over the largest firms in the UK, it says, which is stifling competition from smaller rivals. Buit is there actually anything the regulators can do about it?

In fact, in 2010 the big four apparently audited 99 members of the FTSE 100, who (according to a recent House of Lords report) change their auditor on average once every 48 years. And this is not just about loyalty: according to the OFT, the size of their market share is also pushed up because switching auditors is complex to explain to investors, not to mention expensive, while the larger firms also have a more extensive international network. Also, smaller firms themselves aren’t always keen to taking on FTSE 100 clients, because it can be a decidedly risky business. So they leave it to the big boys.

This new probe represents a significant widening of the OFT’s remit, which had originally been to investigate the practice of banks forcing loan customers to go with one of the big four as a condition of lending. But it's had its eye on the Big Four for a while now, so it doesn't come as a complete surprise.

The OFT is also thinking about whether to refer the case to the Competition Commission, which has more power to actually change  practices it doesn’t like. It says it’s going to chat to the firms in question over the next month before it makes a final decision (and unsurprisingly, they all seem terribly enthusiastic about it, saying they’ll support ‘any’ measures to increase competition in the industry).

The question is whether there's anything the latter can do - this is clearly an international issue, and it's not easy to see whether there are any remedies that can be applied here in the UK that will resolve the problem. And even if it could, would smaller auditors want the extra hassle and risk of dealing with the biggest firms? Watch this space...

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