'Big four' auditors referred to Competition Commission

The consumer protection regulator decided to refer the market for audit services in the UK to the Commission following a public consultation, which closed in September.

The OFT has been "concerned for some time" about the "highly concentrated" audit market, citing low levels of switching and substantial barriers to entry.

In 2010 PwC, KPMG, Deloitte and Ernst and Young earned 99% of the auditing fees paid by the top 100 companies by share capital, it said.

It added that only 2.3% of FTSE 100 companies switched auditing provider annually between 2002 and 2010.

The Commission is an independent body tasked with considering whether market conditions in the UK are competitive and healthy and considering the impact those conditions have on consumers and the economy. Both UK and EU competition law prohibit businesses with significant market shares unfairly exploiting their strong market positions.

Under the Enterprise Act, the OFT can refer a market to the Commission if it has reasonable grounds for suspecting that features of that market prevent, restrict or distort competition in that area.

The European Commission is considering changes to the auditing market at a European level. However, the OFT said that the "nature, content and timing" of the legislation was not settled. It added that the Commission's inquiry had the potential to address UK-specific competition concerns that might not be within the scope of the EU's work.

OFT Chief Executive John Fingleton said that the current market for large company audits lacked "the indicators of a competitive market".

"Voluntary and industry-led efforts to increase competition and choice in this market have proved unsuccessful. Following extensive consultation, we have concluded that a reference to the Competition Commission is appropriate. We believe that such an inquiry will also complement the EU's legislative process," he said.

However, the auditors themselves insisted the market was "fair and competitive".

"We see this market investigation as an opportunity to show that this is a fair and competitive market. We also believe that the evidence that will come out of this review will help to inform the ongoing European debate on the provision of audit services," said Richard Sexton of PwC.

He added that all of his firm's corporate audit engagements were for one year only, after which company shareholders had to vote to decide whether to reappoint the same auditor.

KPMG said that it welcomed an inquiry which it said would "bring to a head the long running arguments and discussions over the structure of the UK audit market."

"We look forward to a thorough process of gathering the data and going the analysis before reaching any conclusions on the need for market intervention," the firm said in a statement.

The Commission has a maximum of two years to decide whether any feature of the market for auditing services prevents, restricts or distorts competition and what remedies, if any, it should recommend.

It has asked any interested parties to provide a summary of their views by 11 November 2011 to help it shape its investigation.