APPENDIX 5: SUPPLEMENTARY MEMORANDUM BY
THE OFFICE OF FAIR TRADING (ADT 49)|
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.
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.
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
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.
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 otherswhat can be called a principle
of 'unilateral decidability'.
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.
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.
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.
The OFT will update its website
with further information on its work in the audit market as it
The OFT would be happy to provide any further information
that the Committee may find useful.
2 March 2011
212 Please note that throughout this document 'audit'
refers to external audit only. Back
See: http://www.oft.gov.uk/OFTwork/markets-work/othermarketswork/accountancy-audit Back