‘Big Four’ Auditors Face Probe by U.K.’s Antitrust Regulator

Britain’s antitrust regulator opened an investigation into dominance by the “Big Four” accounting firms, saying the industry is distorted by practices that stunt competition and block smaller rivals.

The probe by the Office of Fair Trading is broader than the watchdog’s earlier proposal to focus on bank loans that force borrowers to use the largest auditors -- KPMG LLP, Deloitte LLP, PricewaterhouseCoopers LLP and Ernst & Young LLP, the watchdog said today in a statement.

“We have been concerned for some time about the extent of competition in this market, with only four large players and substantial barriers to entry,” the London-based watchdog’s executive director, Clive Maxwell, said in the statement.

The investigation may result in a referral of the case to Britain’s Competition Commission, which for the first time could force changes to the industry. Dominance by the four firms, which audit 99 of the 100 largest U.K. companies, has been under review by the OFT since 2002, while a U.K. government committee investigating the financial crisis called for a probe of the industry in March.

The OFT has said the size of the Big Four’s market share is propelled by the cost of switching auditors, the ease of explaining the choice of accounting firms to investors, the extensive international networks held by bigger auditors and the risk associated with auditing larger companies.

The inquiry may be the most high-profile for the OFT since it investigated banks’ equity-underwriting fees -- a probe that closed in January without any action being taken. While the OFT usually conducts its own “market studies” before a referral to the Competition Commission, the agency said that isn’t required in this case because it has been reviewing evidence for about nine years.

Offending Practices

Unlike the OFT, the Competition Commission has the power to ban offending practices. The OFT said it will hold discussions with companies in the industry through next month before making a final decision.

“PwC plans to play a constructive and active part in these discussions,” Richard Sexton, the accounting firm’s head of audit in the U.K., said in a statement.

Ernst & Young and Deloitte said in separate statements that they support measures that increase competition and choice in the industry.

The Financial Reporting Council, which regulates the audit industry in Britain, said it previously reviewed competition in the market and decided an antitrust watchdog was in a better position to investigate. The probe involves an area of “real importance to the future success of our capital markets,” said Stephen Haddrill, the FRC’s chief executive officer.

Cost, Networks

The probe “should include looking at removing any artificial restrictions that merely serve to reinforce the status quo,” said Michael Izza, the chief executive officer of the Institute of Chartered Accountancy in England and Wales.

The U.K. plans to merge the OFT and the Competition Commission amid criticism the OFT is too slow and handles too few precedent-setting cases. Its biggest fines were slashed by an appeals court in March and April and its first criminal case collapsed at trial last year.

To contact the reporter on this story: Erik Larson in New York at elarson4@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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