Competition body launches probe into audit market

Carillion's collapse turned attention on the role and actionsof the audit firms
Carillion's collapse turned attention on the role and actionsof the audit firms

The competition watchdog has launched an investigation into Britain’s auditors following a string of scandals and concerns over conflicts of interest.

The Competition and Markets Authority said on Tuesday that it has begun a detailed study of the audit sector to examine “concerns that it is not working well for the economy or investors”.

As part of the review, the CMA will investigate whether the sector is “competitive and resilient enough to maintain high quality standards”.

The role of the dominant Big Four accountancy giants - Deloitte, EY, KPMG and PwC - is expected to come under intense scrutiny amid calls for them to be broken up.

The CMA pointed to the failure of Carillion and the criticism of those charged with reviewing the construction firm’s collapse, as well as recent poor results from audit quality reviews.

The Big Four were accused by MPs earlier this year of prioritising their own profits after pocketing around £71.6 million in Carillion-related work since 2008, including on its pension schemes, while failing to spot its precarious financial position.

CMA chairman Andrew Tyrie said: “If the many critics of the audit process are right, it is not just the companies which buy audits that lose out; it is the millions of people dependent on savings, pension funds and other investments in those companies whose audits may be defective.

“Sir John Kingman’s independent review of the regulator is a big step in the right direction. And the CMA will now examine the market carefully to establish what contribution more effective competition could make to improving audit quality.”

The CMA’s market study will examine three main areas including choice and switching, given that the largest UK companies still turn almost “exclusively” to the Big Four when selecting an auditor.

A second thread will examine what the role of the Big Four firms means for resilience, the risk being that each of the Big Four auditors is “too big to fail”, potentially threatening long-term competition.

The CMA will also seek to ascertain whether the fact that companies, rather than their investors, pick their own auditor results in a lack of incentive to produce challenging performance reviews.

CMA CEO Andrea Coscelli said: “High-quality audit work underpins a successful economy and benefits us all. Given the in-depth thinking already done by the CMA and the Competition Commission before it, we plan to move swiftly and to issue our provisional findings before Christmas.”

The Financial Reporting Council, the accountancy watchdog, which has been calling for an inquiry, welcomed the CMA’s announcement.