The Financial Reporting Council (FRC) and the Department of Trade and Industry (DTI) have today published a study jointly commissioned by them, “Competition and choice in the UK audit market”.

The study, conducted by economic consultancy Oxera, considered the factors that contribute to the competitive environment for audit services to large listed companies in the UK. Oxera’s study provides an objective, independent analysis of the market and is based on extensive research among audit committees, companies, firms, investors and regulators. Its findings relating to the degree of choice available in the market include:

• 97 per cent of the FTSE 350 companies are audited by one of the ‘Big Four’ accountancy firms
• Many large listed companies report an effective choice of only two or three audit firms and in a small number of cases companies may have no effective choice of auditor in the short term
• Barriers to entry into the market for FTSE 350 audits are high and in current conditions substantial new entry either by a Mid-Tier or a new firm is unlikely
• Any new entrant would need to overcome perception barriers and demonstrate sector-specific skills, international coverage and high quality staff to win audits
• The loss of a Big Four firm could lead to serious problems for some companies and a loss of investor confidence.

Oxera will present key findings from their study at a meeting of stakeholders to be held later this month. Participants at the meeting will have an opportunity to put questions to the Oxera team and to give their preliminary reactions to the report. Details of this meeting are available on the FRC website.

This stakeholder meeting forms the first stage of a wider consultation by the FRC into the public interest issues that may arise from the existing competitive environment for audit services to large listed companies in the UK and how these issues might be addressed. This will include:

• Undertaking a comprehensive evaluation of possible measures to reduce actual and perceived barriers to entry with a view to improving market structure
• Considering options to reduce the risk of unnecessary failure of a significant supplier of audit services
• Contingency planning to reduce disruption to the availability of an effective audit service in the event of the withdrawal of a significant supplier of audit services
• Ensuring that analysis of the issues and any possible approaches to addressing them take full account of the global nature of many audits and the audit firms.

The FRC aims to prepare a discussion paper in May and will hold further meetings with stakeholders to facilitate further dialogue on these issues.

Chief Executive of the FRC, Paul Boyle, commented:

“A well-functioning market for audit services is essential to ensure confidence in corporate reporting and governance. The report from Oxera raises a number of issues about the structure of the audit market in the UK. We look forward to hearing a wide range of views from interested parties in the coming months.”

1. The Financial Reporting Council (FRC) is the UK’s independent regulator for corporate reporting and governance. Its aim is to promote confidence in corporate reporting and governance.
2. From 1 April 2006, the FRC’s functions are the setting, monitoring and enforcing of accounting and auditing standards, setting actuarial standards, overseeing the regulatory activities of the accountancy and actuarial professions, statutory oversight and regulation of auditors, operating an independent investigation and discipline scheme for public interest cases, and promoting high standards of corporate governance.
3. These functions are delivered principally by its operating bodies - the Accounting Standards Board, the Auditing Practices Board, the Board for Actuarial Standards, the Financial Reporting Review Panel, the Professional Oversight Board, and the Accountancy Investigation and Discipline Board – and by the FRC Council.
4. The Full Report "Competition and choice in the UK audit market" can be downloaded here.
5. Details of the stakeholder meeting to be held later this month can be downloaded here.
6. All press enquiries should be directed to Paul George, telephone 020 7492 2340.