The UK's competition watchdog, the Office of Fair Trading (OFT) has concluded that the audit market is not competing effectvely and is now considering a referal to the Competition Commission.

Taking a lead from the House of Lords Economic Affairs select Committee's work on audit, the OFT has decided that there are "reasonable grounds for suspecting that there are features of the market that restrict, distort or prevent competition in the UK".  

Commenting on the decision, Clive Maxwell, OFT Executive Director, said: 'As we told the House of Lords Economic Affairs Committee, we have been concerned for some time about the extent of competition in this market, with only four large players and substantial barriers to entry and switching.

'We believe that the statutory test for a Competition Commission reference has been met, but are keen to understand more about the remedies available in the market and, consequently, whether or not a reference to the Competition Commission would be an appropriate response to our concerns. Our next step is to discuss this with regulators, government, business and the audit industry.'

Stephen Haddrill, Chief Executive of the Financial Reporting Council (FRC), welcomed the OFT's decision: "Having explored ideas for addressing these issues through our Market Participants Group it has become clear to us that the competition authorities are better placed than audit regulators to tackle competition concerns."

It is hoped that the OFT will bring a fresh perspective to a hot topic which has been the subject of heated debate in governance circles since before the Crash with Iain Richards of Aviva Investors and Tim Bush leading investor efforts to protect shareholders' interests.  Although the announcement is a clear red flag of concern, a referal is not automatic. Before a final decision is made the OFT will hold a series of round tables with stakeholders to explore alternative remedies.

Market concentration issues have been under review by the OFT since 2002 when it made an initial monitoring announcement. The OFT's move will be watched closely in Brussels after its response to the EU Green Paper.