Energy companies and banks are often accused of making it difficult for people to switch - now accountants are under the microscope. The Competition Commission has warned that the so-called ‘big four’ audit firms - KPMG, Deloitte, Ernst & Young and PricewaterhouseCoopers (PwC) – are dominating the market and charging companies a ‘higher price’ for ‘lower quality’.
These top four accountancy firms audit 90% of UK-listed big companies; and while the watchdog found no evidence of collusion between the four, it said they stifled competition.
Companies tend not to change their auditors, and almost a third of companies in the FTSE 100 have used the same one for more than 20 years. Two thirds of the FTSE 100 has had the same auditor for 10 years.
The chairman of the Audit Investigation Group, Laura Carstensen, said that senior management at large companies are often inclined to ‘stick with what they know, particularly when it is difficult to compare with the alternatives and the incumbent auditors are in a strong position to hold on to the business.’
The Competition Commission also criticised the cosy relationship between auditors and company management, with some high-ranking members of big four firms also sitting on many company boards. The commission said this means auditors are more focused on satisfying management, who make the decision on which auditor to appoint, rather than shareholders.
But is this anything new? EU officials warned almost a decade ago that Britain’s big four accountancy firms could face EU action to break up their dominance. And some business leaders have also spoken out against them.
Luke Johnson, chairman of Risk Capital Partners and MT diarist, said that while the big accountants don’t act as a cartel, there is a serious lack of choice for fast-growing companies seeking heavyweight auditors and sophisticated advice.
‘Consolidation within the industry has been relentless,’ he said recently. ‘There is gossip that even more mid-tier firms might combine, leaving their customers even fewer options. These mergers have led to a lack of diversity quite different from the legal profession, where there are at least 20 major law firms to which any substantial corporate client can turn.’
The Commission has told auditors to become more transparent and open with shareholders. It also recommended a ban on contractual clauses limiting choice to the ‘big four’ firms, but stopped short of recommending breaking them up.
Andre Spicer, a professor at Cass Business School, said the proposals haven’t gone far enough. ‘If the Competition Commission was serious about improving the independence of audits…it would have considered more radical solutions such as dual auditing or even an independent public body to perform, or at least check, audits,’ he said.
The Office of Fair Trading is now considering the proposals and the Commission will publish its final report later this year.