On 17 May 2011 the Office of Fair Trading (OFT) took the unusual (if not entirely unprecedented) step of announcing, without having first conducted a market study, its provisional conclusion that there were sufficient competition concerns in the audit market to warrant a reference to the Competition Commission (CC) for an in-depth market investigation. Further, despite this announcement, the OFT has not moved to consult formally on a decision to make a reference, but is instead conducting a series of roundtable and bilateral discussions with interested parties before formally consulting on the decision of whether (or not) to make a market investigation reference.
Yet the OFT can hardly be accused of having acted precipitously, given that it issued a statement on competition in audit and accountancy services as far back as 20021. It has also been actively considering issues in the audit market in the context of the report of the House of Lords Select Committee on Economic Affairs report into concentration within the audit market in the UK2 and the European Commission’s Green Paper on audit policy3.
One of the key recommendations made by the House of Lords in its report in March of this year was for “a detailed investigation of the large-firm audit market by the Office of Fair Trading, with a view to an inquiry by the Competition Commission so that all the interrelated issues surrounding concentration, competition and choice can be thoroughly examined in depth and in the round”4. The expected next stage following those recommendations was for the OFT to launch a market study, typically lasting around 6-9 months, to gather sufficient evidence on whether the market should be referred to the CC for a full market investigation (lasting up to two years).
Market studies are one of a number of tools at the OFT’s disposal to address possible competition problems within a particular market, providing the OFT with the opportunity to seek evidence and views from market participants and interested third parties. The OFT may then make a reference to the CC under section 131 of the Enterprise Act 2002 where it has “reasonable grounds for suspecting that any feature, or combination of features, of a market in the United Kingdom for goods or services prevents, restricts or distorts competition”5. However, whilst the OFT must have carried out sufficient work to inform a provisional reference decision, there is no requirement on the OFT to complete a market study.
In this case, the OFT likely considers that a combination of its continued review of competition issues in this sector and the work conducted by the House of Lords renders a further market study phase unnecessary . Furthermore, proceeding in the manner proposed should ensure that if the outcome is indeed a reference to the CC, it can progress the matter without further delay.
The OFT has published guidance on the making of market investigation references to the CC6, including the criteria that must be met before a reference is made. Those criteria include whether “there is a reasonable chance that appropriate remedies will be available”. This appears to be giving the OFT pause for thought, given the nature of competition in the audit market in the UK and its interaction with audit services worldwide.
In a submission to the Select Committee in March of this year, the OFT considered the difficulties of seeking to apply a UK remedy to an issue which so clearly impacts upon audit markets globally, referring to the need to develop a “principle of unilateral decidability”. This encapsulates the OFT’s unusual sense of emasculation; despite having tracked an industry for the best part of a decade, having identified competition concerns, having concluded that the statutory test for reference has been met and having even been urged by Parliament to initiate an investigation, the OFT recognises that to embark on such a course of action would be futile without having sought to consider what, if any, remedies are available.
The OFT should be lauded on such an approach. Attempting to apply a narrow UK solution would fail to address not so much the elephant, as an entire herd, in the room. It would, arguably, be doomed to failure from the outset. The most draconian measure available to the CC would be a structural break-up of the UK operations of the Big 4. Commentators have suggested that it is far from clear that such a remedy would be capable of achieving any significant shift in market share away from the Big 4 (the House of Lords confirmed in its report that in 2010 the Big 4 audited 99% of FTSE 100 and around 96% of FTSE 250 companies). Merely breaking up the Big 4 may increase choice in the UK audit market, but it is presently hard to see what compulsion would be on listed companies to use the newly created entities or other pre-existing rival firms. Given the increasingly international flavour of UK listed companies, it would not be surprising if the great majority simply chose to remain with their international (hence existing) auditor of choice. Others, who welcome the OFT’s move, say that action is required to break what they see as the unfair and anti-competitive “audit grip” of the Big 4, what Antonio Masip Hidalgo MEP describes as an ‘oligopoly’, not just in Europe but globally.
As the MEPs have spotted, whatever the answers to the perceived problem in the UK, it is clear that this represents but the tip of the iceberg. Perhaps attention should now shift to the European Commission’s review, which, in theory, carries with it the possibility of at least a pan-European conclusion or remedy.