59/11    17 May 2011

The OFT has provisionally decided that there are competition problems in the audit market that pass the statutory test for referral to the Competition Commission. However, it is now to discuss with interested bodies whether, in practice, potential remedies exist that could allow the Commission to resolve these problems.

The OFT has been concerned for some time that the market for external audit services to large firms in the UK is highly concentrated, with substantial barriers to entry and switching.

Having considered a wide range of evidence, much of it reflected in the House of Lords Economic Affairs Select Committee's recent report on audit, the OFT has now reached the provisional view that there are reasonable grounds for suspecting that there are features of the market that restrict, distort or prevent competition in the UK.

Having reached this provisional view, the OFT needs to decide whether or not to exercise its discretion to make a reference of the market to the Competition Commission. A key consideration is whether there is a reasonable chance that appropriate remedies will be available to the Competition Commission. It will also be important to assess the relative benefits of action at international or UK level. To consider these issues further, the OFT will therefore be conducting a number of roundtables and bilateral discussions with selected parties in May and June.

Clive Maxwell, OFT Executive Director, said:

'As we told the House of Lords Economic Affairs Committee, we have been concerned for some time about the extent of competition in this market, with only four large players and substantial barriers to entry and switching.

'We believe that the statutory test for a Competition Commission reference has been met, but are keen to understand more about the remedies available in the market and, consequently, whether or not a reference to the Competition Commission would be an appropriate response to our concerns. Our next step is to discuss this with regulators, government, business and the audit industry.'

The provisional decision on whether or not to refer the market to the Competition Commission will be subject to a statutory consultation later this year.

NOTES

1. The OFT has reached the provisional view that the statutory test for reference in Section 131 of the Enterprise Act 2002 is met, namely that there are reasonable grounds for suspecting that there are features of the market that restrict, distort or prevent competition in the UK.
2. Given its provisional decision on Section 131, the OFT is minded to move directly to a provisional decision on whether or not to refer this market after exploring the availability of remedies to the Competition Commission. The OFT concluded that in this instance it did not require a Market Study to reach the provisional decision that the section 131 threshold has been met, given that the OFT has been keeping this market under review for some time and information concerning the performance of the market is available for the OFT to assess. 
3. Download the OFT's published guidance on market investigation references (pdf 1Mb).
4. Further details on the OFT's work on the audit market, including its submissions to the House of Lords Select Committee on Economic Affairs, can be found on the Accountancy audit case page.
5. The OFT will publish further information on the statutory test for reference when it consults later this year on its provisional decision on whether or not to make a reference to the Competition Commission.
6. Information on the OFT's website in relation to this matter will be updated as the work progresses.