The structure of the UK audit sector, and the position of the 'Big Four' within it, has been a matter of public debate for quite some time. Increasingly this year with the demise of Carillion there has been growing pressure to look more closely again at the audit market to help increase competition, especially for clients which may have limited options available to them. Now, in May 2018, a new UK Parliamentary report has urged the UK Government to refer the statutory audit market to the UK's Competition and Markets Authority ("CMA"). The terms of any such referral "should explicitly include" consideration of breaking up the 'Big Four' audit firms into smaller, audit-only organisations. It will be an interesting development to see if the CMA will now for a second time carry out such a major probe into the largest UK auditors. It awaits to be seen what action if any the CMA take in this respect.



Carillion was a major UK multinational construction and facilities management company which entered compulsory liquidation in January 2018 with liabilities of nearly £7 billion and just £29 million in cash. It was a major strategic supplier to the UK public sector (from building roads and hospitals to providing school meals and defence accommodation). The UK Government had committed £150 million of taxpayers' money to keeping essential services running, but over 2,000 people lost their jobs and a pension liability of around £2.6 billion was left.

Two Parliamentary Select Committees (i.e. the Business, Energy & Industrial Strategy ("BEIS") and Work & Pensions Committees Committee ("WPE") were tasked with investigating the collapse of Carillion and jointly issued a report in May 2018.

This report scrutinised the role of the 'Big Four' audit firms which it said had all earned large fees from Carillion for audit and other advisory services. The report described the 'Big Four' as operating an "oligopoly" which it wanted to see broken up:

  • "We recommend that the Government refers the statutory audit market to the Competition and Markets Authority. The terms of reference of that review should explicitly include consideration of both breaking up the 'Big Four' into more audit firms, and detaching audit arms from those providing other professional services." (pargraph 123)

MPs are hoping that the Government's appointment of Andrew Tyrie, a former MP and influential chair of the parliamentary Treasury Select Committee, as chair of the CMA will give the competition regulator the necessary impetus to re-open the earlier closed enquiry or set up a follow-up to look at helping increase competition and deal with conflicts issues.

However, it is not yet certain what action if any the CMA will take. A spokesperson at the CMA has indicated that they are however working closely with the Financial Reporting Council ("FRC") whose role it is to regulate the quality of UK company audits to see what more can be done to improve standards and quality of service. At the moment, the message is that the CMA is open to looking at the audit sector further and will work with the FRC to assess what action, if any, it chooses to take.

Prior UK competition market investigation

The first audit market review started back in 2011, following a recommendation by the House of Lords Economic Affairs Committee, that the CMA's predecessor, the Office of Fair Trading ("OFT") refer the market for statutory audits of large companies to the UK's Competition Commission ("CC"). The CC carried out an in-depth, two year 'market investigation,' taking evidence from numerous interested parties and carrying out detailed economic analyses of the market.

The CC reported on the matter in 2013 and found that competition was restricted in the audit market due to factors which inhibited companies from switching auditors and by the incentives that auditors had to focus on satisfying management rather than shareholder needs.

Once the OFT and CC had merged in 2014 to form the CMA, the latter issued legally binding orders in September 2014. Those orders included:

  • a requirement for FTSE 350 companies to put their statutory audit engagement out to tender at least every 10 years; and
  • measures to strengthen the accountability of the external auditor to the Audit Committee and reduce the influence of management.

It would appear that these remedies were not as successful as hoped by the industry where latest figures from various advisory agencies indicate that the orders had the opposite effect. It is understood the 'Big Four' now audit 99% of FTSE 100 companies, 97% of FTSE 250 companies and that only one FTSE 100 company is audited by a mid-tier firm - that firm only retained this business in a recent audit retender.

It is therefore debatable whether the CMA can affect any real meaningful change or not a second time around - or even if - the concerns are real competition questions for the CMA given the main concern is a perceived lack of quality or insufficient independent rigour of the audit market.

Potential implications

In any event, there appears to be some considerable momentum building behind taking further regulatory action in this market. Two recent indications stand out:

  • The Secretary of State for Business, Energy & Industrial Strategy, Greg Clark, has said he was "not averse" to reconsidering competition in the audit market, as concentrated markets tended to act against the interests of consumers (March 2018).
  • Similarly, Andrew Tyrie, now the incoming Chair of the CMA, has said that "something needs to be done" about the audit market (April 2018).

Despite the fact that the CMA looked at this market in detail as recently as 2014, the CMA may well feel a growing need to respond to Parliamentary and ministerial pressure, plus the personal interest of its new chair, Mr Tyrie. Precedent for that may be seen in the OFT's decision to look at the market in 2011, after accepting a recommendation by a House of Lords select committee.

The CMA has various options at its disposal, including consulting on and / or opening a six-month 'market study,' or an in-depth two-year 'market investigation', or even taking potential enforcement action against specific firms (albeit the latter would appear unlikely for the moment).

A fresh two-year CMA 'market investigation,' gives the CMA legally binding powers to demand information and to make orders. A market investigation would take and consider carefully detailed submissions from interested parties. That could provide an important opportunity for firms to express their views as to how the market is operating and whether in fact the recommendation to split the 'Big Four' is beneficial or not to industry.

A six-month 'market study' could serve as a prelude to a full 'market investigation' or remain a stand-alone exercise, at the end of which the CMA might make recommendations or propose to take no further action. Only where sufficiently robust evidence existed of anti-competitive conduct might the CMA choose to take enforcement action against specific firms, but, this does not appear to be what the report is seeking nor the most adequate tool for the CMA to review the sector based on the current concerns.

As to whether any break-up would achieve the outcome of increasing competition and dealing with the conflicts issue is debatable. Some suggest the process would be futile if the international branches of the auditors remain concentrated. Nor would it necessarily add any new competition on the audit market, but instead create smaller players potentially with limited industry expertise and resources, unable to replicate the necessary infrastructure to service clients (whether national or global).

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