198. Concerns about independence and audit quality are not restricted to KPMG. Together, the Big Four global accountancy firms, PwC, KPMG, Deloitte and EY, have dominated the audits of major UK companies since the implosion in 2002 of Arthur Andersen, the fifth member of what was then a Big Five. The Big Four oligopoly has been subject to two Official UK competition inquiries:
• in 2005, the Department for Trade and Industry and the FRC commissioned a study by Oxera, an economics consultancy, into competition and choice in the UK audit market, which reported in 2006;531 and
• In 2011, following a recommendation by the House of Lords Economic Affairs Committee, the Office for Fair Trading referred the market for statutory audits of large companies to the Competition Commission (CC), which reported in 2013.532
199. Both studies found substantial barriers to effective competition. For example, the prospect of a new firm entering the market should loom as a healthy threat to incumbent firms. Oxera's report found that a rival to the Big Four was unlikely to emerge:
Substantial entry is unlikely to be attractive, due to significant barriers, including the perception bias against mid-tier firms, high costs of entry, a long payback period for any potential investment, and significant business risks when competing against the incumbents in the market.533
It concluded that market entry by mid-market firms was only feasible if reputational bias against smaller firms was reduced and low rates of switching between auditors were increased.534
200. The Competition Commission found that systemic factors acted against switching. Tendering for audit was expensive and had uncertain benefits. The incumbent firm had the opportunity to respond to any dissatisfaction from the audited company. Furthermore, the incumbent auditors and the audited benefit from mutual understanding and continuity. The CC concluded that "companies are offered higher prices, lower quality (including less sceptical audits) and less innovation and differentiation of offering than would be the case in a well-functioning market".535
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531 Oxera, Competition and choice in the UK audit market, April 2006
532 Competition Commission, Statutory audit services for large companies market investigation, October 2013
533 Oxera, Competition and choice in the UK audit market, April 2006, executive summary page p i
534 As above.
535 Competition Commission, Statutory audit services for large companies market investigation, October 2013, para 34