Lords press Chancellor to commit to Big Four competition review

The Chancellor has rejected calls from members of the House of Lords for a the break-up of the Big Four audit firms, saying that any decision to review audit market domination rests with the Competition and Markets Authority (CMA), reports Sara White

At an evidence session at the House of Lords Economic Affairs Committee, Chancellor Philip Hammond was asked about the dominance of the Big Four audit firms and whether the government planned to review the firms’ hold on the listed audit market.

Hammond said: ‘The government has commissioned Sir John Kingman to lead an independent review of the FRC and to ensure its role is fit for purpose and CMA says it is continuing to monitor the remedies put in place since the 2013 enquiry.’

The Kingsman review is focusing exclusively on the role and powers of the Financial Reporting Council (FRC) as regulator, and is due to report back to government by the end of 2018. It will not consider audit domination issues.

Hammond said: ‘We will look forward to Sir John Kingman’s review to recommend measures that will improve regulation of the audit market,’ he added, stressing that the review ‘is looking specifically at the powers of the FRC, so this is an indirect review. Has the FRC the necessary powers to do its job properly?’

Committee chair Lord Forsyth of Drumlean pressed Hammond on the issue of Big Four dominance.

‘Will that [Kingman] include looking at whether there is a case for breaking up the Big Four or splitting their auditing functions from their consulting functions?’, Lord Forsyth asked.

Hammond refused to be drawn on the issue of auditor ‘concentration’, batting the issue over to the CMA, which is responsible for competition issues.

‘That is more an issue for the CMA – that is for the CMA to determine,’ said Hammond. ‘The government has the power only in exceptional circumstances to make a referral to CMA.

‘It is normally the responsibility of CMA to look at this and various stakeholders have called on CMA to investigate the audit market, indeed to consider break-up of the Big Four or to impose a cap on market share, and various stakeholders have also called for an increase in the powers of the FRC which is why we have asked Sir John Kingman to look at this issue.’

Hammond said: ‘This has come under increased scrutiny since the collapse of Carillion – the committee will know that since the UK and EU reforms came into effect the Big Four share of FTSE 350 has increased from 95 to 98% so on the face of it there has been an increase in concentration and it is up to the CMA to actively monitor the market.’

Big Four dominance has increased since the release of the first House of Lords Economic Affairs Committee report into the lack of competition in the audit market, published in 2011, which led to a Competition and Markets Authority review. Subsequent changes to UK audit rules, including the ‘comply or explain’ requirement on audit tenders and mandatory tendering for audit every 10 years. The latter was subsequently watered down by the EU Audit Regulation and Directive (ARD), allowing UK listed entities to retain an auditor for up to 20 years depending on market pressures.

The new chair of the CMA Lord Andrew Tyrie called for a whole scale review of the listed audit market when he was chair of the Commons Treasury Committee.

The CMA has not ruled out the likelihood of a further investigation into the audit market.

A CMA spokesperson told Accountancy: ‘We continue to monitor the audit sector to decide whether to take further action.’

Report by Sara White

House of Lords Economic Affairs Committee, Auditors: Market concentration and their role report 2010-11, issued March 2011, 72pp



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