The OFT has identified a number of features of the market for statutory audit services to large firms in the UK which it has reasonable grounds to suspect prevent, restrict or distort competition. We have referred this matter to the CC for a detailed inquiry.
The OFT's decision document (pdf 682kb) sets out the features that the OFT suspects are restricting, distorting or preventing competition. In short, the OFT considers that the audit market for large companies in the UK is highly concentrated, with substantial barriers to entry and switching. We refer to the decision document for complete details. However, the features set out there are as follows:
The OFT held a series of roundtable and bilateral meetings with 29 stakeholders during June 2011 where we considered potential remedies in this market and whether or not a reference would be appropriate. Participants included audit firms, investor organisations, shareholder groups, professional bodies, regulators, Government bodies and academics.
Subsequently there was a public consultation after we announced our provisional decision to refer the market to the CC. That consultation ran for six weeks until 9 September 2011 and was open to all. We received submissions from 20 organisations and individuals.
When a reference is made, the CC will conduct a detailed public inquiry and reach its own conclusions about the market concerned.
During the inquiry, the CC can compel parties to submit particular evidence, a power which the OFT generally does not have. In addition, the CC has the power to impose remedies which go beyond the outcomes available to the OFT.
The OFT considers that there is a reasonable chance that appropriate remedies will be available to the CC in the event that it finds one or more adverse effects on competition.
The OFT's decision document (pdf 682kb) sets out a number of potential remedies aimed at:
It is not the OFT's role to determine which remedies would and would not be appropriate. It is important to note that the CC will perform an independent inquiry and reach its own conclusions on remedies if it finds that any are needed.
The OFT is fully aware of parallel initiatives in Europe. Indeed, the OFT submitted a response to the European Commission's Green Paper on audit policy in December 2010.
The issues of concurrency, overlap and interaction with European initiatives were an important part of our roundtable and bilateral discussions during June 2011.
We consider that an inquiry by the CC would fit well with the progress of legislative initiatives by the European Commission. At present, the nature, content and timing of these initiatives are not settled and the legislative process might take up to two years. Further, there is a lack of evidence regarding the likely impact and effect of certain potential remedies in the UK. The OFT considers that the CC might input its analysis of specific measures into the European legislative process, where appropriate. The CC would also be well-placed to consider whatever transitional measures or implementation arrangements might be required at national level.
In addition, the OFT considers that there are specific competition concerns about the operation of the market for statutory audit services in the UK that may not be within the scope of the European Commission's work. The EC could not be expected to resolve in full the OFT's concerns, or to address any UK specific issues that are not analogous to or replicated in other Member States.
We note that there were a number of consultation responses that spoke of the important role played by the UK as one of the largest audit markets in the world and also as the base of several of the global audit networks.
The OFT has been keeping this market under review since 2002, and has long-standing competition concerns which are outlined in our decision document (pdf 682kb). Given the availability of public information on the performance of this market and the information supplied by stakeholders in recent roundtable and bilateral meetings, the OFT determined that a Market Study was not necessary in this case.
Yes. The OFT does not necessarily need to conduct its own Market Study before deciding on whether or not to make a MIR. The OFT always needs to be sufficiently well informed before reaching its decisions, including ones to refer a market to the CC, but this need not be through a full-scale Market Study. In respect of personal current account services in Northern Ireland, the OFT referred the market to the CC (pdf 252kb) following consideration of a super-complaint by Which?. In the Liquefied Petroleum Gas (LPG) case, the LPG market was referred to the CC following a preliminary review of the market by the OFT - see press release OFT refers supply of domestic bulk LPG to the Competition Commission (5 July 2004).
We can only refer if we have reasonable grounds to suspect the existence of any feature, or combination of features, of a market which prevent, restrict or distort competition in the UK. The features of the market that we have identified in our decision document (see answer to Q1, above) relate to the market for the audit of the larger listed companies in the UK.
Back to: Statutory audit - 21 October 2011
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