Audit Commission's audit practice 'should become separate firm', say peers

31 Mar 11
A Lords inquiry has backed calls for the Audit Commission’s in-house audit division to become a stand-alone entity, saying this would stop further ‘oligopoly’ by the Big Four accountancy firms.

By Lucy Phillips

31 March 2011

A Lords inquiry has backed calls for the Audit Commission’s in-house audit division to become a stand-alone entity, saying this would stop further ‘oligopoly’ by the Big Four accountancy firms.

The Lords’ Economic Affairs Committee published the findings of its eight-month probe into the UK’s audit market yesterday.

The Big Four – Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers – were found to dominate the audit market in the private sector. Establishing a stand-alone entity out of the commission’s audit division, following its abolition, could reduce this concentration, increasing competition and choice. It would be the fifth largest audit firm in the UK, representing about 10% of the market.

Committee chair Lord MacGregor of Pulham Market, a former Tory Cabinet member, warned of the consequences of not doing this. He told Public Finance: ‘If it [the commission’s in-house practice] was abolished, there would be a lot of very good people to go into the private sector... If the Big Four picked up all the work, it would increase the oligopoly and we are asking the government to take this into account.’

The government is currently considering three options for the Audit Commission’s audit work after its abolition. These are: outsourcing to the private sector; setting up an employee-owned mutual; and retaining some form of residual body to manage the market.  The commission’s 900 audit staff are reported to favour an employee-owned mutual audit practice. A decision is expected imminently.

The Lords also call on the government to ‘make greater efforts’ to enable non-Big Four firms to win other public sector work to further open up the market.

But regulator the Financial Reporting Council said preventing the Big Four from taking on the Audit Commission’s work and ensuring more smaller firms win other public sector contracts could breach European Laws on public procurement. In its evidence to the committee, the council said: ‘Practical difficulties that may need to be overcome to ensure the UK complies with European law relating to the procurement of public contracts but [we] believe the prize of greater competition in the market makes this proposal worthy of further consideration.’    

The report, Auditors: market concentration and theirrole, also noted that International Financial Reporting Standards, which became mandatory for EU listed companies in 2005, had lowered audit standards. They ‘encouraged box-ticking and reduced scope for auditors to exercise judgment to reach a true and fair view’, the committee said.

Yesterday ministers published a consultation on the future of local public audit.

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