Supplementary memorandum by the Office
of Fair Trading (ADT 49)
1. This additional submission is made by
the Office of Fair Trading (OFT), further to its submission of
24 September 2010 and its appearance before the Committee on 9
November 2010. The OFT is grateful to the Committee for this opportunity
to give an update on its work in relation to the market for audit
services.[49]
2. The OFT gave oral evidence at a relatively
early stage of the Committee's evidence gathering. On 9 November,
the OFT indicated that competition in the market for the provision
of audit services to large companies in the UK may be limited.
This additional submission gives an update on recent developments
and a summary of the OFT's thinking about ongoing and potential
future work in relation to the audit market.
3. Since 9 November 2010, the OFT has submitted
a response to the European Commission's Green Paper on audit policy.
The OFT has also liaised with other bodies, including the Financial
Reporting Council and the Department of Business, Innovation and
Skills (specifically on audit-related elements of the current
joint HM Treasury and BIS-led Growth Review). During these bilateral
discussions, the OFT has continued to suggest an exploration of
the possibility of a reduced form of statutory audit (which might
give greater scope for voluntary forms of assurance) and queried
whether the current statutory audit framework is suitable for
SMEs.
4. At European level, the OFT attended the
Brussels audit conference on 10 February 2011. DG MARKT has received
a very large number of submissions in reply to its Green Paper.
The European Commission's response to the consultation will, therefore,
continue to take shape over the coming months, with further developments
not now expected until the autumn.
5. In actively keeping the audit market
under review, the OFT has also considered possible targeted interventions
by the OFT itself against an over-arching principle of what the
UK competition regime can effectively resolve, which will not
duplicate existing efforts by others—what can be called
a principle of "unilateral decidability".
6. While the OFT wishes to remain actively
engaged, it recognises that many possible issues related to audit
market concentration cannot be resolved effectively by a UK competition
authority acting alone. The regulatory and supranational character
of many of the discrete issues in this market means that, although
certain improvements might be sought through regulatory intervention
or legislative change, such changes would likely need to be international
in scope and application to be successful.
7. With these points in mind, the OFT is
currently giving further consideration to more formal project
work, such as a targeted Market Study, and is undertaking the
initial steps in scoping such a potential study. At present, we
consider that further examination of the existence and effect
of bank covenants (which potentially limit companies' auditor
appointment choices) might be warranted. Where any other aspects
of the audit market satisfy our principle of "unilateral
decidability", the scope of our potential study might be
expanded as necessary. Any such work would be subject to Board
approval.
8. The OFT will continue, on other matters,
to input into the debate around European regulation of statutory
audit, including its form and framework. Further, the OFT remains
alert to the potential issues regarding systemic risk posed by
audit market concentration. The OFT has continued to push for
consideration of this issue in international fora (principally
the OECD). In particular, the OFT has sought to raise the issue
of how merger regimes in different countries might react to a
scenario involving the failure of a large audit firm and the disposal
of its assets, given the prospect of a "four to three"
increase in concentration. In this context, the OFT will continue
to work to promote such merger regime discussion and preparedness.
9. The OFT will update its website[50]
with further information on its work in the audit market as it
becomes available.
10. The OFT would be happy to provide any
further information that the Committee may find useful.
2 March 2011
49 Please note that throughout this document "audit"
refers to external audit only. Back
50
See: http://www.oft.gov.uk/OFTwork/markets-work/othermarketswork/accountancy-audit Back
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