London: Europe's biggest professional services firms now face threats on two major fronts following the decision of the UK's Office of Fair Trading, OFT, to refer them to the Competition Commission, just days before the EU Commission is expected to recommend that they should sell off their consulting arms.
On Friday the OFT referred the market for the supply of statutory audit services to large companies in the UK to the Competition Commission (CC) for further investigation. The move has drawn a withering response from firms, with PwC warning the OFT to be wary of "unintended consequences" such as undermining audit quality.
The decision by the OFT to make a market investigation reference follows a public consultation which closed in September.
The OFT says it has been concerned for some time that the audit market is highly concentrated, with low levels of switching and substantial barriers to entry.
In 2010, it points out, the four largest firms (PwC, KPMG, Deloitte and Ernst & Young) earned 99 per cent of audit fees paid by FTSE 100 companies. Between 2002 and 2010, the average annual switching rate among FTSE 100 companies was only 2.3 per cent.
John Fingleton, OFT Chief Executive, said:
'The market for large company audits lacks sufficient competition and does not work well for customers. It is highly concentrated, largely supplied by four big firms, with clients rarely switching between auditors. There are also high barriers to entry for new and smaller competitors. These are not the indicators of a competitive market.
'Voluntary and industry-led efforts to increase competition and choice in this market have proved unsuccessful. Following extensive consultation, we have concluded that a reference to the Competition Commission is appropriate. We believe that such an inquiry will also complement the EU's legislative process.'
Richard Sexton, PwC's Board Member for Reputation and Policy said:
"PwC believes in competitive markets where buyers are able to choose freely on the basis of quality and price. We see this market investigation as an opportunity to show that this is a fair and competitive market. We also believe that the evidence that will come out of this review will help to inform the ongoing European debate on the provision of audit services.
"Large companies which are the focus of the investigation are sophisticated, demanding and discerning buyers of professional services. Their operations are often complex and international and require an audit firm which has sector expertise and can operate on a comparable international basis.
"There is fierce rivalry as we compete vigorously for audit appointments. All of our audit engagements are for one year only, after which shareholders must vote again to decide on our reappointment."
Sexton added: "PwC's market position reflects many years of investment across our network infrastructure, tools and methodologies, people and capabilities all of which has been necessary to meet the demands of global businesses and regulators."
"It will be important for the Commission to listen to the views of business through the course of this market investigation and to take account of the potential unintended consequences of any intervention, particularly where they could impair audit quality, add costs and complexity to business, and damage the competitiveness of the UK economy, particularly in these most challenging of times."
Before provisionally deciding to refer the market to the CC, the OFT says it held a number of meetings with audit service providers, customers and regulatory bodies.
One of the issues considered by the OFT during these meetings was the potential for overlap with parallel work going on at a European level.
However, the OFT says the nature, content and timing of EU legislation are not settled and it believes that there are a number of important inputs that the CC might make during the legislative process. The OFT also believes that a CC inquiry has the potential to address UK-specific competition concerns that may not be within the scope of the EU's work.
The big firms were already braced for disruption from the EU, following the leak earlier this month of radical proposals from the directorate-general for the European Union's single market. Commissioner Michel Barnier, envisages forcing clients to change auditors regularly, making two auditors work together on the accounts of the biggest companies, and most controversially, banning audit firms from providing non-audit services.
This would take the European market down the US route, where since the collapse of Enron, and the demise of its auditor Arthur Andersen, providing most non-audit services to audit clients is forbidden, under the Sarbanes-Oxley act.
Given the fact that all the big firms who divested their advisory businesses in the wake of Enron have grown them back again, and that in both US and Europe, consulting business is growing far faster than audit, Barnier's proposals would undermine the professional service firm business model. His report is expected in November.