AABA SUBMISSION TO THE OFFICE OF FAIR TRADING (OFT)

  A RESPONSE TO THE OFT’S CONSULTATION DOCUMENT
“A REVIEW OF COMPETITION IN THE PROFESSIONS”
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The following comments are made in relation to the UK accountancy profession. The comments note that the OFT review is concerned to ensure that “The customers of United Kingdom professions need from the professions an appropriate choice of services, provided efficiently and to a high standard. The professions must be competitive, unfettered by unnecessary restrictions and free to adopt the business structure best suited to meeting clients’ needs” (page 2).

The above inevitably begs the questions as to what are the client’s needs. Unlike mathematicians, designers, scientists, computer experts and many other occupations,  accountants enjoy the state guaranteed markets for external auditing (e.g. under the Companies Act 1985) and insolvency (e.g. under the Insolvency Act 1986). They cannot be said to be operating in ‘free markets’. The act of reserving (e.g. by legislation) the state guaranteed markets for a narrowly defined occupational group could be rationalised by arguing that it is/was a part of a social contract (or a bargain) under which in return for a state guaranteed monopoly, the accountancy profession is obliged to be publicly accountable. Its ‘clientele’ therefore should not really be understood  as its economic clients but society as large.

In market economies, issues about competition should not be seen as matters of reckless competition. They should be related to issues about social responsiveness and accountability. The absence of these qualities does not enable the public to make informed choices.

This response is accompanied by the following papers:

Arnold, P., and Sikka, P., (2000) “Globalization and the State-Profession Relationship: The Case of the Bank of Credit and Commerce International”, Working Paper, University of Essex.

Cousins, J., Mitchell, A., Sikka, P., and Willmott, H., (1998). “Auditors: Holding the Public to Ransom", Basildon, Association for Accountancy & Business Affairs.

Cousins, J., Mitchell, A., Sikka, P., Cooper, C., and Arnold, P., (2000). “Insolvent Abuse: Regulating the Insolvency Industry”, Basildon, Association for Accountancy & Business Affairs (in press).

Dunn, J., and Sikka, P., (1999). "Auditors: Keeping the Public in the Dark", Basildon, Association for Accountancy & Business Affairs.

Owen, S., (2000). "Estimating Increases in Profit Margins of Large UK Accounting Firms", Working Paper, Manchester Metropolitan University.

Sikka, P., (2000). “The Colour of Accountancy”. An article on the Accountingweb (Accountingweb.co.uk).

General comments

SPECIFIC QUESTIONS

Question 1: What qualifications/training must a potential entrant to the profession possess? In addition to qualifications and training are they any other requirements for entry (e.g. periods of work experience, membership etc.)?

Question 2: Does the profession on which you comment impose any obligations in relation to continuous professional development or any other ongoing obligation as a pre-requisite for continued practice? What are these? Question 3: What do you think are the objectives of any such requirements? Do you think these objectives are justified? If yes, please state the justifications. Do you think that these requirements are more onerous than necessary to achieve the objectives? If yes, please give reasons for your view, along with any proposed alternative(s) to the present requirements (e.g. the approach adopted in another jurisdiction). What are the effects of entry requirements on:
(a) the profession in question;
(b) clients and the general public;
(c) the range, quality and price of the services available? Question 4: Is the provision of certain services reserved to members of one or more professions or to groups of members within a profession who have particular qualifications or a certain level of seniority?  What is the nature of the relevant restriction (professional rules, a National or Community legal requirement, etc.)? Question 5: Are members of the profession on which you comment restricted as to the kind of organisation through which they may provide their services (e.g. prohibition on partnership or fee sharing with members of other professions, stipulations in professional rules or legal requirements as to appropriate business arrangements etc.)? Please give details of the origin and extent of any such restriction. Question 6: What are the objectives of the restriction? Do you think these objectives are justified? If yes, please state the justification. Do you think that the restriction is more onerous than necessary to achieve the objectives? If yes, please give reasons for the view, along with any proposed alternative(s) to the present restriction (e.g. the approach adopted in any other jurisdiction). What are the effects of this restriction on:
(a) the profession in question;
(b) clients and the general public;
(c) the range, quality and price of the services available?  The consultation document places the competition issues in the context  of ‘globalisation’ (page 2). However, it is silent on what this means. It is not too unreasonable to believe that ‘global’ competition requires some local/global accountability. There is evidence to show that accountancy firms lack proper accountability. For example, following the closure of the Bank of Credit and Commerce International (BCCI), the US regulators subpoenaed Price Waterhouse (thought to be a global firm) to give an account of its audit of BCCI and show its working papers and files to the regulators. Price Waterhouse had secured the audit of the BCCI Group by claiming that it was a ‘global’ firm. However, when called to account, its claims of ‘globalisation’ simply disappeared. The firms obtained a legal opinion which stated that
 
"The 26 Price Waterhouse firms practice, directly or through affiliated Price Waterhouse firms, in more than 90 countries throughout  the world.  Price Waterhouse firms are separate and independent legal entities whose activities are subject to the laws and professional obligations of the country in which they practice ...
 
(N)o partner of PW-US is a partner of the Price Waterhouse firm in the United Kingdom; each firm elects its own senior partners; neither firm controls the other; each firm separately determines to hire and terminate its own professional and administrative staff.... each firm has its own clients; the firms do not share in each other’s revenues or assets; and each separately maintains possession, custody and control over its own books and records, including work papers.  The same independent and autonomous relationship exists between PW-US and the Price Waterhouse firms with practices in Luxembourg and Grand Cayman". (United States, Senate Committee on Foreign Relations,  The BCCI Affair: A Report to the Committee on Foreign Relations by Senator John Kerry and Senator Hank Brown, December 1992. Washington, USGPO., p. 257).  Question 7: Does the profession on which you comment involve itself in any way with the level or structure of charges levied by its members for their services? Is there a scale of charges in operation in relation to any of these services? If so, please state if this is mandatory (including maximum or minimum prices) or recommended. If the scale is recommended please provide details, in so far as possible, of the extent to which members adhere to the fee scale and of the relationship between scale prices and prices actually charged. Question 8: Please provide details of any rules, regulations, codes of practice, guidance, standard forms of contract, other publications, conventions or conduct which deal directly or indirectly with charges for services. Social Security Committee, (1993). The Work of the Maxwell Insolvency Practitioners (Fourth Report), London, HMSO.

Mirror Group Newspapers plc v Maxwell and Others [1998] BCC 324
Mirror Group of Newspapers n Maxwell & Others [1999] BCC 684

The secrecy means that the public has little opportunity to obtain value for money or to compare prices charged by rivals.

Question 9: In relation to any price guidance on which you have submitted observations, please give details of any objectives which you think the guidance pursues. Do you think these are justified? Is the price guidance necessary to achieve these objectives? If yes, please give reasons for your view along with any proposed alternative (e.g. the approach adopted in another jurisdiction). What effect does the price guidance have upon:
(a) the profession and its members;
(b) clients and the general public;
(c) the range, quality and price of the services available?

Question 10: Where members of a profession are restricted in their freedom to advertise any aspect of their services through any medium, please provide details of the nature and the extent of the restriction.

Accountants are not permitted to advertise prices of their services.

In their advertisements they are not permitted to say that they are cheaper, better or more efficient  than X.

Question 11: What are the objectives of any such restriction? Do you think these are justified? Is the restriction more onerous than is necessary to achieve these objectives? If yes, please give reasons for your view along with any proposed alternative (e.g. the approach adopted in another jurisdiction).
What effect does the restriction have upon:
(a) the profession and its members;
(b) clients and the general public;
(c) the range, quality and price of the services available?

The objective is clearly to disadvantage the consumer. The restriction on advertising prices or their competitiveness should be removed.

Question 12: Are there any other ways in which you consider the delivery of professional services to be restricted?

Accountancy firms claim that the provision of consultancy services to audit clients does not impair their ability to perform independent audits. If this is so, then there is no logic in preventing banks, Tesco, Marks & Spencer, Virgin and others from entering the audit market.

If the audit market is to be preserved for accountants, then they should act exclusively as auditors i.e. not be permitted to sell non-audit services to audit clients.

Question 13: What do you think are the objectives of the restriction?  Do you think these purposes are justified?  If yes, please state the justifications. Do you think that the restraints are more onerous than is necessary to meet any justified purposes?  If yes, please give reasons for your view, along with any proposed alternative(s) to the present requirement (e.g. the approach adopted in another jurisdiction). What are the effects of the restrictions on:
(a) the profession and its members;
(b) clients and the general public;
(c) the range, quality and price of the services available?

Thus there are economic reasons for preventing auditors from selling non-auditing services to their audit clients.

Question 14: Do you feel that the governing body(s) of the profession on which you comment is (are) representative of the profession as a whole? Do you feel that the balance of interests represented within the governing body(s) is appropriate.  If certain interests within or beyond the profession are, in your view, over/under represented, say what these are and provide details of the nature of any restriction which contributes to this.

I my opinion, the professional accountancy bodies are not representative of the profession as a whole.

References

Arnold, P., and Sikka, P., (2000) “Globalization and the State-Profession Relationship: The Case of the Bank of Credit and Commerce International”, Working Paper, University of Essex.

Cousins, J., Mitchell, A., Sikka, P., and Willmott, H., (1998). “Auditors: Holding the Public to Ransom", Basildon, Association for Accountancy & Business Affairs.

Cousins, J., Mitchell, A., Sikka, P., Cooper, C., and Arnold, P., (2000). “Insolvent Abuse: Regulating the Insolvency Industry”, Basildon, Association for Accountancy & Business Affairs (in press).

Dunn, J., and Sikka, P., (1999). "Auditors: Keeping the Public in the Dark", Basildon, Association for Accountancy & Business Affairs.

Owen, S., (2000). "Estimating Increases in Profit Margins of Large UK Accounting Firms", Working Paper, Manchester Metropolitan University.
Simon, D.T., (1985), "The Audit Services Market: Some Additional Evidence", Auditing: A Journal of Practice and Theory, Fall, pp. 71-78.

Simunic, D., (1980). "The Pricing of Audit Services: Theory and Evidence", Journal of Accounting Research, Spring, pp. 161-190.

Simunic, D., (1984). "Auditing, Consulting and Auditor Independenc", Journal of Accounting Research, Autumn, pp. 679-702.