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July 26, 2009

EC publishes audit concentration study results

The European Commission should strive to reduce all potential barriers to the entry, growth and survival of audit firms in the international audit market in order to help reduce concentration, according to 90 percent of respondents to an EC consultation.

The consultation sought comments on control structures in audit firms and their consequences on the audit market; 67 responses were received. In general, respondents agreed there is a need to open up the international audit market and decrease the market share held by the Big Four or at least ensure the current market structure does not deteriorate further.

Most respondents said changing the rules to allow external investment in audit firms would not help reduce concentration. They argued a lack of access to external financial capital is not the most significant barrier preventing the emergence of new players.

However, some of the respondents said allowing external investment in audit firms might help smaller firms to grow.

Almost half the respondents said human capital is more important than financial capital for audit firms to expand internationally.

Most auditors who responded to the consultation were opposed to the external investor model but some suggested rules could be amended to include other professionals who work full time in audit firms and are subject to the same ethical rules, such as tax advisors.

Some respondents suggested the current loose associations of audit firms into networks limits the efficiency of the services performed and that the creation of more integrated firms and network should therefore be encouraged.

Respondents also suggested measures to address the lack of recognition by audit clients of the actual audit capabilities existing on the market, especially the services that mid-tier audit firms can provide.

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