UK: Peers Call On OFT To Investigate Domination Of Big Four In Audit Market

Last Updated: 14 April 2011
Article by SJ Berwin's EU & Competition Team

The House of Lords Select Committee on Economic Affairs has called on the Office of Fair Trading ('OFT') to investigate the UK audit market.  Their specific concern relates to the domination of the audit market for large companies by the four biggest players, namely Deloitte, Ernst & Young, KPMG and PwC (the 'Big Four').

The report states that the 'clear oligopoly' of the Big Four creates issues regarding competition and choice in the audit market.  Of the FTSE 100 companies only one is not audited by the Big Four and, on average, an auditor remains in place at one of these companies for 48 years.   Furthermore, of the FTSE 250 companies, 240 are audited by one of the Big Four.

The report was particularly critical of the situation regarding bank auditing, as Ernst & Young does not participate in this area of the market.  The Select Committee raised concern about the prospect for competition if one of the Big Four were to withdraw or collapse, as happened in 2002 with Arthur Anderson, auditor of Enron.  The report states that the 'disconcertingly complacent' attitude of bank auditors had been a 'significant contributory factor' in the banking crises, specifically highlighting PwC's role as auditor of Northern Rock. 

The OFT gave evidence to the Select Committee and identified aspects of the audit market which it considered tended to restrict competition.  These factors included the lack of incentive to switch auditors as there was little apparent difference in offerings and difficulty in discerning audit quality.  This is reinforced by the costs on switching auditor, requiring management time, a tender process and familiarisation of the auditor with the business.  In addition, the Big Four have the technical and international capabilities necessary to service the largest companies, which may restrict access for second tier firms.

Potential methods for increasing competition include the outlawing of restrictive bank loan clauses which require the borrower to be audited by a Big Four firm and introducing a requirement to re-tender audit contracts every five years.

The OFT has said it is currently considering whether to conduct a market study into the audit market, although it may limit this to looking specifically at the effect of bank covenants.  Such a market study could result in a referral to the Competition Commission and, subsequently, recommendations to government for changes in laws and regulations and/or potentially far reaching remedies.

CAT cuts penalty fines in construction recruitment cartel

The fines imposed by the OFT in cartel cases have again come under scrutiny by the Competition Appeal Tribunal ('CAT'), this time in relation to the OFT's construction recruitment cartel.  In 2009 the OFT imposed penalty fines on Eden Brown, CDI and Hays, along with three other recruitment agencies, for price fixing and engaging in a collective boycott of a new entrant.  As in the recent construction bid rigging CAT judgments, the OFT's methodology for setting fines has been criticised for being too mechanistic.

In particular, the CAT found that the calculation of relevant turnover was inappropriate in the context of the market. It found that the OFT erred in using the gross turnover of the companies, rather than after deduction of the wages paid to temporary workers.  Since a substantial proportion of the business of each of the agencies comprised the placing of temporary workers, the use of gross fees increased the computation of relevant turnover by over four times.  The CAT highlighted that relevant turnover is used to reflect the effective scale of activity of each undertaking and that the OFT cannot simply take the turnover figure from a company's accounts if there is a more appropriate figure which can be used. 

In addition, as in the earlier construction bid-rigging cases, the OFT erred in using the relevant turnover from the year before the decision, rather than the year prior to the infringement (which was held to be more appropriate as it better reflects the impact of the infringement).

Similarly, as in previous cases, the CAT also found that the application by the OFT of the Minimum Deterrence Threshold was inappropriately mechanistic.

However, the CAT held that the OFT was entitled to use 9% of relevant turnover (i.e. just 1% below the maximum starting % set out in the OFT's penalty guidance) to reflect the seriousness of the infringement in this case, given that price fixing and collective boycott are among the most serious kind of infringements.  Further, the CAT agreed that it was reasonable for the OFT to apply a modest 5% reduction in fine to take account of the fact certain of the parties had introduced a compliance programme.

As a result, the CAT has substantially reduced the fines imposed on the three companies, from around £39 million to £7.9 million - Eden Brown from £1.07m to £477,750, CDI from £7.6m to £1.5m and Hays from £30.3m to £5.8m.

Supreme Court declines to hear appeal in Safeway v Twigger case 

The UK's Supreme Court has declined to hear a further appeal by Safeway against a Court of Appeal ruling that the supermarket could not recoup antitrust fines from certain former members of staff who, it claimed, were behind the anti-competitive pricing practices.

Last December, the Court of Appeal ruled that an OFT fine could not be recouped from the former Safeway directors and executives, because the sanction had been imposed on the company alone (see Community Week issue 503).  The Court of Appeal further held there was a public policy interest in not allowing companies to shift their liability onto individuals and insurers.

Even though the Court of Appeal refused Safeway (which was acquired by Morrisons in 2004) permission to appeal its judgment, Safeway applied directly to the Supreme Court arguing that an important principle of law was at stake.

The Supreme Court, the UK's highest court, is understood to have now rejected that application.

The dispute goes back to an OFT antitrust investigation into alleged collusion between supermarkets and dairy processors in relation to the retail prices of certain dairy products.  In 2007 Safeway agreed to enter into an 'early resolution' agreement with the OFT which involved admitting its involvement in the infringement in return for a reduction in fine.  Safeway then took steps before the courts to recover the fine and certain costs from its staff, arguing that they were behind the price-fixing practices and should therefore be liable.

The Supreme Court's decision means that there can be no further judicial scrutiny in the UK.  As such, it is clear that the financial consequences of infringing the Chapter I infringement fall solely on the undertaking found to be in breach. It also means that policy initiatives by the OFT to encourage employees to blow the whistle will not be distorted by potential private actions by their employer.

To view Community Week Issue 516, 8 April 2011 in full click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.