LONDON (Reuters) - Britain’s listed companies could be forced to switch accountants to boost competition and end the cosy relationships that have dismayed shareholders, a UK watchdog warned on Friday.
Competition in the UK audit market is restricted by factors that make it hard for companies to switch accountants, the Competition Commission said in preliminary findings from a probe it began in 2011.
There is also a tendency for auditors to focus on satisfying management rather than shareholder needs, it said.
The commission’s findings disappointed the big accountants but raised a cheer among their smaller rivals and will bolster a draft European Union law which contains similar plans for boosting competition in the 27-country bloc’s audit market.
The United States is also mulling auditor rotation as the sector globally faces questions after it gave banks a clean bill of health just before governments had to rescue them in the 2007-09 financial crisis.
The “Big Four” - KPMGKPMG.UL, PwC PWC.UL, Ernst & Young ERNY.UL and DeloitteDLTE.UL - check the books of nearly all big companies in Britain and around the world and have often served the same clients for decades.
“We have found that there can be benefits to companies and their shareholders from switching auditors but too often senior management at large companies are inclined to stick with what they know,” said Laura Carstensen, who chaired the watchdog’s audit probe.
The lack of competition is likely to lead to higher prices, lower quality and a failure to meet the demands of shareholders and investors, the commission said.
There was “significant dissatisfaction” among big investors and changing the “long standing and entrenched” system will take time.
It proposed a mix of reforms, including forcing companies to put out their audit work to tender every five to seven years, and change accounting firms every seven to 14 years - roughly in line with changes being discussed at the EU level.
This goes further than a recent change introduced by Britain’s accounting policeman, the Financial Reporting Council, which requires companies to consider changing accountants every decade. The FRC said it was pleased the Comission was looking at taking more steps to enhance competitiveness and switching.
The commission also proposes banning “Big Four only” clauses, meaning banks could not insist on a borrower using one of the four top audit firms.
The probe found that 31 percent of the top 100 companies and a fifth of the next 250 firms had had the same auditor for over 20 years.
The Big Four insist there is strong competition and point to downward pressure on fees and some recent switchings of auditors among big companies.
PwC said its audits clearly report to shareholders and that the Competition Commission has “grossly underestimated” the critical role the audit committees at clients play in protecting shareholder interests.
Ernst & Young said it was pleased the watchdog found no collusion, abuses or excess profits but rejected accusations that the audit market was not serving shareholders.
“In addition, we believe that competition between audit firms is healthy and robust and that the evidence supports this,” E&Y said.
But second tier of audit firms, such as Mazars, BDO and Grant Thornton, welcomed the findings after having argued it would not be worthwhile expanding unless there was some intervention to help prise open the market.
“It’s clearly going to make a significant contribution in Brussels as the European institutions decide the way forward on the future shape of the EU audit market,” said David Herbinet, Mazars’ UK head of public interest markets.
Herbinet urged the UK watchdog to go a step further and put a limit on the advisory services accounting firms sometimes also supply to clients they audit.
BDO said the mix of changes would create a healthier market.
The watchdog rejected curbing the Big Four’s advisory services such as tax to clients they audit, and said joint audits, whereby one of the Big Four must share a customer with a smaller accountant, was also a non-starter for now.
Joint audits were a top demand from several mid-tier firms and could still be included in the EU law.
The Competition Commission will publish its full report next week and final, binding recommendations by year end.
The European Parliament’s legal affairs committee is due to vote on the bloc’s audit shake-up next month after a delay to await the outcome of the UK findings.
Editing by Jeremy Gaunt.