WHEN I was a stripling, learning economics at Glasgow University, we were taught about the evils of oligopoly, a market with few enough firms that price competition is eroded, to the detriment of the customer.
Competition does not disappear but companies learn they have more to gain through tacit collusion than outright warfare. Of course, executives don’t actually confer – in the US you’d end up wearing an orange suit. But somehow prices gravitate to a common average well above marginal cost, incomers are excluded, and everyone gets lazy.
Of course, this could never, ever happen in the world of accountancy and auditing. Once upon a time (1989 to be exact) this market was dominated by eight large companies. Then came globalisation. Through a process of mergers – plus the self-destruction of Arthur Andersen as a result of being caught up in the Enron scandal – the Big Eight have become the Big Four: Deloitte, Ernst & Young, KPMG and PwC. Collectively, they audit 90 per cent of Britain’s major listed companies.
Yesterday, the Competition Commission dared to accuse the Big Four of committing all the sins of oligopoly, plus a few more. In particular, the commission warns of the “tendency for auditors to focus on satisfying management rather than share-holders’ needs”.
I could translate that into plain English but I’d be sued. True, you can blame clients for being lazy: a third of FTSE 100 firms haven’t changed their auditor for more than 20 years, which means auditing companies don’t need to compete with each other. Which is why, on both sides of the Atlantic, the authorities are pondering making it mandatory for companies to change auditors at regular intervals.
The European Commission wants to go further and force the Big Four to split their audit and consultancy arms. The latter point is germane. The audit business per se is mature and hardly likely to grow during the global downturn. Which means the consultancy and tax advisory business is where the Big Four see their future.
Last year Deloitte increased its consulting revenues by 13.5 per cent and its tax planning (tax avoidance?) revenues by 15 per cent. However its audit revenues rose by only 6.1 per cent. If the Big Four are becoming consultancies with an audit function tacked on, it is no wonder they end up on the side of their corporate clients.
Berlusconi back on the radar as Italy votes
The latest European Commission forecast for the eurozone (a fifth of the global economy) foresees a contraction of 0.3 per cent this year, reversing an earlier projection of 0.1 per cent modest growth in 2013. In truth, the new forecast is only the commission catching up with reality but it does suggest that the weaker eurozone countries could miss their deficit reduction targets.
The key issue is how the European electorate will respond to yet another year of austerity and 19 million unemployed. We’ll find out tomorrow when Italy goes to the polls. The result is in doubt due to an unexpected last minute jump in support for populist, anti-austerity parties. These are led by former prime minister Silvio Berlusconi (who promises to reverse tax rises) and comedian Beppe Grillo, whose 5-Star Movement could win 20 per cent of the vote. Pointer: the spread between safe German ten-year bonds and their Italian equivalent jumped this week.