Lords call for probe into audit oligopoly

The “oligopoly” of Big Four auditors contributed to the financial crisis, according to a damning report released yesterday by the influential House of Lords Economic Affairs Committee.

The committee, chaired by Conservative Lord MacGregor, called for a full probe into concentration in the industry by the Office of Fair Trading, citing the fact that 99 of FSTE 100 companies are audited by one of the big four – Ernst & Young (E&Y), PricewaterhouseCoopers (PwC), Deloitte and KPMG.

The Lords blasted the auditors’ role in the financial crisis as displaying a “dereliction of duty” and a sense of “complacency” that led to them signing off on accounts that they should have questioned.

The committee’s conclusions on the “culpability” of the Big Four in the crisis were roundly criticised by the industry.

The Institute of Chartered Accountants in England and Wales (ICAEW) said: “We do not accept that auditors contributed to the severity of the financial crisis. They did the job that they were expected to do.”

A Big Four source called the report a “broadside attack” on the industry and said the tone of it was “unhelpful”.

Despite objecting to the report’s language, however, many auditors welcomed some of the Lords’ practical suggestions, particularly for more dialogue between audit firms and regulators and for direct consultation with shareholders about the appointment of auditors.

The report said that a “self-reinforcing cycle had helped to consolidate the dominance of the Big Four” and that it represents a “systemic risk”, particularly in the banking sector because conflicts of interest mean that only three are “active”.