Mid-tier accounting firms have reminded the competition watchdog to be wary of defining the audit market too narrowly in the course of its inquiry into statutory audit services.
In response to questions from the Competition Commission around defining the market, BDO said that it welcomed the pragmatic approach of the CC, which recognised that 'constraints from outside the market and any segmentation within it' are relevant to the analysis of competition, regardless of the precise delineation of the market.
'It is obvious, for example, that competition issues that apply with regard to the audit of FTSE company number 351 are unlikely to be very different from those applying to FTSE company number 350. BDO appreciates that the CC will adopt a reasonable approach and consider all relevant factors. However, BDO wishes to highlight concerns that would arise if the CC were to focus too closely on a market defined only as the provision of audit services to all FTSE 350 companies,' the firm said.
The firm also took issue with the definition of the relevant product market solely as the provision of audit services to all FTSE 350 companies, which it said did not reflect the heterogeneous composition of the FTSE 350.
'The nature and scope of the audit of the largest FTSE 100 companies is not necessarily representative of, nor reflected in, the audit requirements of smaller companies, particularly those companies that are at the lower end of the FTSE 350. Accordingly, a lack of differentiation between the FTSE 350 companies could result in the over-attribution of characteristics and audit requirements of the largest FTSE 100 companies to all FTSE 350 companies,' the firm said.
The firm also challenged assertions by the CC that it could not find evidence of separate markets within the supply of audit services to FTSE 350 companies, and cited Ernst & Young's perceived weakness in banking/financial services as a case in point.
In its submission PwC took the opportunity to remind the CC of the significance of some of the behaviours of the FTSE 350 companies.
The CC, PwC said, suggested that when FTSE 350 companies tender, they do not switch from larger firms to mid-tier firms, but are likely to switch the other way, reflecting the reality that when the largest companies consider the services of the mid-tier firms at tender, the mid-tier firms are not successful.
'Concentration is therefore not a result of the mid-tier firms not having the opportunity to tender for FTSE 350 audits, but of companies choosing to appoint the large audit firms on the basis of the more attractive package of experience and expertise, quality service and price that they offer,' PwC said.
Hitting out at the mid-tier, PwC said: 'The mid-tier firms assert that they could audit most of the FTSE 350, but acknowledge there are 30-60 audits they could not provide within the FTSE 350. In contrast, the large firms not only assert that they could provide such services but have a track record of actually having done so in each of the most complex sectors of the FTSE 350 over a number of years.
'Moreover, despite the CC survey suggesting the mid-tier have been invited to participate in 30% of FTSE 350 audit tenders in recent years (and so having had considerable exposure to FTSE 350 companies), the CC's survey and case study evidence showed a clear majority of finance directors and audit committee chairs believe that only a large firm could provide their audit service.'
The Commission is expected to deliver its findings in the first quarter of 2013.
