Audit market

What was the client issue?

Is there a problem of competition and choice in the audit market? What happens if another of the Big Four collapses like Andersen? Our report for the Financial Reporting Council and Department of Trade and Industry sparked a fierce debate and had a profound impact.

How did we help the client solve it?

Our 2006 FRC/DTI report was the first time that any analysis of competition levels in the audit market had been carried out. We examined in detail the process of auditor choice, the evolution of the market structure, the consequences of high concentration for choice, the implications of limited choice for competition, and the relationship between concentration and audit fees. We also analysed the prospects for market entry by mid-tier firms, and the implications for effective market operation of the hypothetical exit of a Big Four firm. Based on 67 interviews across all stakeholder groups, a survey of 50 audit committee chairs, and extensive statistical and financial modelling, our report uncovered deep-seated concern about the concentration of power in the hands of the Big Four audit firms.

Why was the outcome compelling for the client?

How far reaching were the report’s conclusions? It triggered a consultation by the independent regulator, the Financial Reporting Council, to address public interest issues brought up by the research. The terms ‘pre and post Oxera audit world’ - first coined by Accountancy Age - entered industry parlance, and we were commissioned to produce a study for the European Commission. During the 2008 financial crisis, when policy focused on auditors again, Oxera Director, Dr Gunnar Nielswas called to give expert testimony before the House of Lords. When the subsequent Office of Fair Trading/Competition Commission investigation started, BDO and Grant Thornton wanted us in their corner.