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Should the OFT Refer Problems in the Audit Market to the Competition Commission?

Wednesday, August 10, 2011

Sarah Jane Leake | Bloomberg LawStatutory Audit: Consultation on the OFT's provisional decision to make a market investigation reference to the Competition Commission of the supply of statutory audit services to large companies in the UK – Office of Fair Trading Consultation Paper OFT1357 of 29 July 2011 Earlier this year, the House of Lords Select Committee on Economic Affairs (Committee) published its much anticipated report on the audit market.1 In its report, the Committee made significant criticism of the "big four"2 firms' domination of the market and argued that such a high degree of market concentration unfairly limits competition and choice. Concerned about the seriousness of the problem, the Committee called upon the Office of Fair Trading (OFT) to conduct a detailed investigation into the UK audit market, with a view to making a market investigation reference (MIR) to the Competition Commission (CC). In May, the OFT announced that there were sufficient problems in the UK audit market to merit referral to the CC.3 In other words, the statutory test for referral, set out at section 131 of the Enterprise Act 2002, had been met: there were reasonable grounds for suspecting that there are features in the audit market that restrict, distort or prevent competition in the UK. However, before making a final decision on whether or not to make a MIR, the OFT wanted more time to explore with stakeholders whether or not appropriate remedies exist. After three months of liaison with industry, the OFT concluded that there is room to improve competition within the audit market, and announced its provisional decision to make a referral to the CC. Section 169 of the Enterprise Act provides that before making a market investigation reference to the CC, the OFT must consult with those whose interests are likely to be affected by the reference. To this end, on 29 July, the OFT launched a consultation on whether a referral should be made.

The Audit Market

Under Part XVI of the Companies Act 2006 (CA 2006), a large number of companies are required to have their annual accounts externally audited. The auditor is required to provide an assurance that the firm's financial statements provide a true and fair view of the company. Auditors therefore play a key role in maintaining public and investor confidence in companies and in the financial system as a whole. In the OFT's estimation, audit fees for FTSE 350-listed companies last year amounted to at least

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