The Market Participants Group was established in October 2006 to provide advice to the Financial Reporting Council on possible actions that market participants could take to mitigate the risks arising from the characteristics of the market for audit services to public interest entities* in the United Kingdom. The Group is comprised of individuals from companies, investors and audit firms.
The Group noted that due to the level of auditor concentration there is a high degree of concern amongst market participants over the uncertainty and costs that could arise in the event of one or more of the Big Four firms leaving the market. This risk could be mitigated through increased choice of auditors. However a number of current market characteristics, when taken together, reduce the propensity of non-Big Four firms to offer to audit public interest entities and the propensity for public interest entities to select non-Big Four firms as auditors.
The Group evaluated a wide range of possible actions to increase choice of auditors. It decided that possible actions should, when combined with others, contribute to increased choice whilst at least maintaining audit quality, at a cost which is proportionate to the likely benefits and at a cost which is lower than any alternatives offering equivalent benefits.
This interim report sets out provisional recommendations for actions which the Group currently believes could, when taken together, enhance the efficiency of the market and in so doing mitigate the risks associated with a firm leaving the market. The main objectives of the 15 provisional recommendations are to:
The provisional recommendations set out actions that could be taken by market participants working collectively, some of which require support from regulators, to allow the market to work more efficiently. The Group believes that its package of provisional recommendations could result in individual market participants having greater incentive to act in ways that could, in the long term, lead to increased choice of auditors.
The Group considers that agreement over market-based measures in the UK would make a useful contribution to the wider international debate on audit market concentration. A wide degree of market support would be needed to ensure the success of market-based actions and the Group will therefore consider responses to the consultation questions shown on page 11 before finalising its recommendations.
