Exclusive: Top Bosses 'Too Close To Auditors'

Mark Kleinman, City Editor
Exclusive: Top Bosses 'Too Close To Auditors'

The executives who run Britain's biggest companies have an excessively cosy relationship with the major audit firms that has enabled the quartet of accountants to exert a long-running stranglehold over the industry, the competition regulator will say tomorrow.

In a long-awaited report on one of Britain's most important professional services industries, the Competition Commission will say that while there is no evidence of collusion or a conspiracy between the 'Big Four' auditors, the industry does suffer from restricted competition.

However, the watchdog will not recommend a full break-up of the market's major players - Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers - in its statement of possible remedies aimed at bolstering competition in the market, instead saying that it wants to explore the most effective combination of potential measures.

I have learnt that among the proposals that will be floated by the Competition Commission will be a possible ban on the use of 'Big Four-only' clauses in loan documentation used in major companies' financial arrangements.

The competition watchdog will also raise the prospect of mandatory rotation of audit clients, although it will stop short of a formal recommendation of such a measure. Its full interim report will be published on Monday, with concrete proposals made in the Commission's final report later this year.

One insider close to the Commission said that its report, which has already faced a months-long delay, would suggest that increasing accountability to shareholders, potentially through new corporate reporting requirements, might help to promote competition. Investors, the report is expected to say, do not play a sufficiently engaged role in companies' choice of auditors.

Last October, the Commission raised concerns about the influence of the large numbers of executives from the leading accountancy firms who sat on the boards of Britain's biggest companies.

"It is possible that this familiarity will make them more favourably disposed to the appointment of a Big Four rather than a non-Big-Four firm ... on the other hand, it could make them less aware of the quality and experience of the non-Big-Four firms," it said at the time.

Its acknowledgement that firms outside the Big Four struggle to break the quartet's oligopoly will almost certainly lead to calls for the competition watchdog to go further.

The Big Four firms have argued that the market for auditing Britain's biggest companies is sufficiently competitive despite the fact that many FTSE-100 companies have had relationships with their auditors lasting for several decades.

Recently, there has been evidence of some switching between members of the Big Four, although it is almost unprecedented for a member of the UK's blue-chip index to go outside their ranks to a second-tier accounting firm.

This week, RSA, the insurance group, said it was moving its audit work from Deloitte to KPMG, and insiders say that Barclays may switch away from PwC after a new finance director joins later this year.

The major auditors have been criticised for failing to identify warning signs ahead of the 2008 banking crisis.

The European Commission is also examining the structure of the audit market, including the imposition of mandatory rotation and restrictions on the provision of non-audit services.

A Competition Commission spokesman declined to comment ahead of tomorrow's publication.

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