The U.K. Competition Commission has released preliminary findings that conclude that the audit market is not serving shareholders, citing “the tendency for auditors to focus on satisfying management rather than shareholder needs”. Overall, the commission found fault with the lack of effective competition, noting that 67 percent of FTSE 100 companies and 52 percent of FTSE 250 companies have had the same auditor for more than ten years. This lack of switching was blamed on a number of factors, most notably a general preference to avoid switching costs and an overall reluctance to use a firm outside of the Big Four (KPMG, PWC, Ernst & Young and Deloitte).
The commission also provide possible remedies, which are similar to suggestions that have been made in the U.S., including:
- mandatory rotation of audit firms
- prohibition of ‘Big-4-only’ clauses in loan documentation
- strengthened accountability of the External Auditor to the Audit Committee
- enhanced shareholder-auditor engagement
- extended reporting requirements.
Not surprisingly, the findings were met with resistance from the Big Four and open arms from the second tier firms.