UK competition authorities are to probe the stranglehold of the world's biggest accountancy firms on British blue-chip company audits after finding evidence of anti-competitive behavior.
The Office of Fair Trading (OFT) said dominance of the sector by the so-called Big Four threw up barriers for rivals and made it hard for firms to switch auditors.
The OFT said on Tuesday there were reasonable grounds for suspecting features of the market restrict, distort or prevent competition in Britain.
In some cases, banks will only lend to companies that have been audited by one of the Big Four.
The OFT's move comes on top of criticism from some policymakers who blame accountancy firms for giving banks a clean bill of health just before they had to be shored up during the financial crisis.
But policymakers also worry markets could be destabilized if one of the four went under -- repeating the collapse of Arthur Andersen in 2002, which reduced the number of big auditing firms from five to four.
The European Union's executive European Commission is set to publish draft legislation later this year to boost competition in the sector.
But past efforts to open up the industry have made little headway and critics say global action would be needed because these accounting firms span the world.
The auditors -- KPMG
In 2010, the four audited 99 of the companies in the FTSE 100 index. Those companies changed auditors every 48 years on average, according to a parliamentary report in March that called for the sector to be investigated.
The OFT said it would meet with the Big Four in May and June to explore what reforms can be made before deciding on whether to pass the issue to Britain's Competition Commission.
Otherwise, action at the international level could be more beneficial, the OFT said.
The OFT has been concerned for some time that the market for external audit services to large firms in the UK is highly concentrated, with substantial barriers to entry and switching, it said.
London and New York are the top auditing centers in the world and changes may not be effective unless they were transatlantic.
KPMG said it was important to bring to a head the long-running debate on competition and choice and supports market-based and not regulatory intervention.
KPMG believes that there is already effective competition and pricing in the UK audit market and look forward to hearing from the OFT its reasons for believing otherwise, the company said.
Ernst & Young said it backed increasing choice such as reinforcing the audit committee's role in auditor appointments, removing 'Big Four only' restrictive covenants from loan agreements, liberalizing audit firm ownership rules, and the creation of a single market for audit services in Europe.
PwC said it would actively take part in the round tables. Deloitte said it would support measures to increase competition and ensure a level playing field.
Accountancy bodies welcomed the OFT statement.
The process the OFT has started today will consult broadly on what remedies can be taken to improve choice in the market, said Michael Izza, chief executive of UK accounting body the ICAEW.
This should include looking at removing any artificial restrictions that merely serve to reinforce the status quo, Izza said.
(Editing by David Cowell and Jane Merriman)