Fund giant demands competition inquiry into stranglehold of 'Big Four' audit firms

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Britain's biggest insurer has asked the Department of Trade and Industry to launch a competition inquiry into the provision of auditing services to UK public companies.

Britain's biggest insurer has asked the Department of Trade and Industry to launch a competition inquiry into the provision of auditing services to UK public companies.

Morley Fund Management, part of the Aviva group which trades as Norwich Union in the UK, has asked the DTI to instigate a Competition Commission investigation into the dominance by the Big Four accountancy firms' of audit work carried out for quoted companies.

At the moment Deloitte & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers control 100 per cent of the audit work for FTSE 100 companies and 96 per cent of audits carried out for companies in the FTSE 250 index.

"Given the state of and consolidation in the market, a full Competition Commission inquiry into the market for audit opinions should be undertaken," Morley said.

It said improving competition in the market for audit services was central to improving the quality of audits, which were becoming increasingly formulaic and anodyne as the Big Four accountancy firms sought to limit their exposure to future liability claims.

Business leaders have long complained that the Big Four's dominance has led to a lack of choice in many services, such as the provision of due diligence work where the Big Four regularly find themselves unable to compete for work because of conflicts of interest.

Morley's call for a Competition Commission investigation was contained in its submission to the DTI's review of auditors' liability, launched as part of the Government's wider review of company law.

In the wake of various corporate scandals, audit quality and auditor liability have become increasingly important both for accountancy firms and for shareholders who rely on audited accounts when making investment decisions.

Morley's call for an inquiry was echoed yesterday by Hermes, which manages the BT and Post Office pension funds.

Peter Butler, Hermes' corporate governance spokesman, said: "Our view is that it is not appropriate for the issues raised in consultations on auditor liability to be dealt with in isolation. We believe it is the quality of the audit which is critical. We would like to see a fundamental review of how audits are delivered to the benefit of shareholders. Liability comes after that."

Morley has told the DTI that the issue of auditor liability was a "red herring" on its own. The quality of audit work was the key issue, it said, but a lack of competition in the market was encouraging a "dumbed down" environment, post-Enron. This in turn was creating a barrier to new entrants offering higher quality audit services.

It said accountancy firms were increasingly worried about liability risks as investors took an increasingly critical view of their role as auditors.

This led accountancy firms to seek to contain exposure to liability risks both through the legal framework but also through "anodyne opinions" and a more formulaic rather than judgement-based approach, Morley said.

"This self perpetuating circular dynamic has contributed to a damaging, downward spiral in the quality of audit, as well as in investor and public confidence."

Accountants favour capping their liabilities for a corporate failure to a multiple of their fees earned from the company.

David Illingworth, the president of the Institute of Chartered Accountants in England & Wales, said: "The whole problem about auditor liability is the problem of auditors having to pick up the bill for everybody else's messes. They should pick up the bill for their own mess but not for others'."