On 24 October 2011, the UK Office of Fair Trading (“OFT”) referred the market for statutory audit services to large companies in the UK to the UK Competition Commission for further investigation.
The OFT believes PwC, KPMG, Deloitte and Ernst & Young, collectively known as the “Big Four”, may represent an oligopoly in the large company audit market in Britain. The firms account for 99 per cent of the total auditing fees paid by FTSE 100 companies.
The OFT considers that there is a national market for statutory audits services to large companies. The OFT has been concerned for some time that the market is highly concentrated, with low levels of switching and substantial barriers to entry and expansion, as well as barriers to exit. As such, the OFT is concerned that the market may not be working well for customers.
The OFT can make a market investigation reference to the Competition Commission in circumstances where it has reasonable grounds for suspecting that any feature of a market in the UK prevents, restricts or distorts competition in connection with the supply or acquisition of any goods or services in the UK. UK market investigations aim to determine whether competition is working effectively in a market as a whole and, therefore, differ to investigations about particular anti-competitive agreements or abuses of dominance (misuses of market power). Market investigations give the Competition Commission the power to conduct an investigation where it does not have reasonable grounds to suspect the existence of anti-competitive agreements or an abuse of dominance.
The OFT provisionally referred the market for statutory audit services to large companies in July 2011 and a public consultation followed.
Following the reference, it is now for the Competition Commission to decide whether competition is prevented, restricted or distorted, and what, if any, action should be taken to remedy the adverse effect on competition or any detrimental effect on customers.
In Australia, the ACCC has a prices surveillance power which is not as extensive as the UK’s market investigations power. As part of its prices surveillance power, the ACCC may, at the request of the Minister, monitor prices, costs and profits, hold an inquiry and issue reports. However, the prices surveillance power does not give the ACCC express powers to remedy anticompetitive conduct (although the ACCC can draw on its powers in other parts of the Act). By contrast, in the UK, the Competition Commission may prohibit discriminatory practices, impose price control, and require the divestiture of company assets.
The last time the ACCC exercised its prices surveillance power was during its 2008 Grocery Inquiry. Following the inquiry, the ACCC identified concerns that restrictive provisions in lease agreements in respect of supermarket space could restrict the ability of supermarket operators to establish supermarkets in shopping centres. The ACCC conducted investigations into whether restrictive provisions in lease agreements could have the purpose and/or effect of substantially lessening competition in a market.
In response to the ACCC’s concerns supermarkets (including Coles, Woolworths, ALDI, Franklins, SPAR and Metcash) voluntarily provided undertakings pursuant to section 87B of the Act. The undertakings provide that the supermarkets will not give effect to restrictive provisions contained in leases that have been in existence for more than 5 years, or enter into a new lease that includes a restrictive lease provision.