UK to probe bank covenants favouring big auditors

City A.M. Reporter
The government has asked regulators to investigate whether banks help to entrench the "Big Four" auditing firms' dominance through restrictive lending agreements with companies.

Chancellor George Osborne's Budget included a call to the Office of Fair Trading to probe whether bank covenants lock out smaller auditors.

The Financial Reporting Council had expressed concern to lawmakers last year that clauses in some covenants force companies to use only one of the "Big Four" accounting firms – PwC, Deloitte, KPMG and Ernst & Young.

The FRC said the government had listened to its concerns and hoped the OFT would push ahead with a probe.

The auditing sector is already being watched due to its role in giving banks a clean bill of health in the run up to the financial crisis.

The House of Lords is finalising a report into the current arrangement in which one of the Big Four checks the books of nearly all the world's top companies.

They also dominate auditing of mid-sized companies, which has sparked accusations from smaller auditors they are being locked out by restrictive clauses in lending agreements.

A probe appears inevitable as the European Union also looks at ways to inject competition into auditing, fearing mayhem in financial markets if one of the Big Four were to go under – as happened following the collapse of Arthur Andersen, which formerly helped make up an auditing Big Five.

"We are aware of the recommendation today. We have been keeping the audit market under review since 2002 and we have already made clear we are interested in the area of bank covenants," OFT spokesman Frank Shepherd said.

"We have already undertaken the initial steps into scoping for a potential market study, and that is subject to OFT board approval. The board is likely to make a decision in April," he said.