A RESPONSE TO THE OFT’S CONSULTATION DOCUMENT
“A REVIEW OF COMPETITION IN THE PROFESSIONS”
=============================================================

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

• The UK accountancy profession enjoys considerable patronage form the State. Its members enjoy state guaranteed markets relating to external audits and insolvency. However, the enjoyment of this monopoly has not been accompanied by adequate public accountability requirements (Dunn and Sikka, 1999). For example, neither the auditing nor the insolvency industry has an independent regulator. Unlike the water, gas, electricity, food and the financial services sectors, the auditing and insolvency industries do not have an independent complaints investigation system or an independent ombudsman to provide quick and cost effective adjudication. There is no effective system for investigating the delays in completing insolvency work. For example, Stone Platt was placed into receivership and then liquidation in 1981, yet the insolvency has still not be finalised. Coloroll was placed into receivership in 1991 yet it has still not been finalised. Neither the DTI nor the Recognised Professional Bodies (RPBs) pay any attention to the delays in completing insolvency work (see Cousins et al, 2000 for further details).

• Following the Companies Act 1985 and the Insolvency Act 1986, the accountancy bodies act as regulators for the auditing and the insolvency industry. However, they have no independence from these industries. They actively lobby to secure economic advantages for accountancy firms. They have done little to advance the interests of the users of auditing and insolvency services (for some evidence see Cousins et al,1998).

• Following the 1990 House of Lords’ judgement on the Caparo case, auditors do not owe a ‘duty of care’ to individual shareholders, creditors, employees or other stakeholders. Insolvency practitioner do not owe a ‘duty of care’ to the parties affected by their actions. Despite enjoying state guaranteed markets, accountants have not been required to publish any meaningful information about their affairs. Hardly any reliable information is available about the income, charge out rates, efficiency or effectiveness of accountants. Unlike the hospitals, schools and universities. There are no league tables to show the performance of accountancy firms.

• The weak market and legal structures fail to provide adequate economic incentives to deliver high quality service or proper accountability. The relative absence of economic incentives to complete the work efficiently and effectively, together with poor regulation and accountability means that the accountancy profession does not give value for money. Consumers of audits and insolvency services are poorly equipped to call accountancy firms or their regulators to account.

• The patronage of the state, the use of audits as loss-leaders, cross-subsidisation of services sold by accountancy firms, unfair competition and poor mechanisms for public accountability have enabled major accountancy firms to increase their profit margins (not the same as profits) by some 95%  (Owen, 2000).

• Unlike the members of the Institute of Chartered Accountants in England & Wales (ICAEW), the members of the Association of Chartered Certified Accountants (ACCA) are forced to buy the ACCA’s in-house magazine Accounting and Business. Others can also buy this magazine at a published prize. However, the ACCA members not wishing to receive the magazine are not entitled to a refund equivalent to the cover price. This is grossly unfair.

• Accountancy bodies inflate the circulation figures for their in-house magazines. This enables them to charge higher advertising rates. For example, in view of the poor quality of the magazine, I and some other members have refused to receive the ACCA in-house magazine Accounting and Business. However, I understand that the magazine’s circulation figures are based upon the entire membership eligible to receive the magazine rather than only the members receiving the magazine. Thus the circulation figures include members who do not receive the magazine.  This enables the magazine to justify its advertising rates. However, the circulation figures are false.

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.)?

• The entrants to the UK accountancy profession have to pass the required examinations. To use designatory letters, the individuals have to provide evidence of suitable work experience. Those entering public practice (audit, insolvency) have to show relevant work experience.

• However, given the almost daily exposures of audit failure and poor standards of insolvency work, it is doubtful that the professional education always equips accountants to perform their tasks and deliver services of high standards.

• Individuals with alternative qualifications (e.g. BA/BSc, MA/MSc, PhD) are also well equipped to deliver tax, consultancy, audit, review and other services, yet are not allowed to compete with the accountants belonging to the recognised accountancy trade associations. This is an unfair restriction on competition. Some accountancy bodies are further seeking to limit competition by seeking a statutory label ' accountant' for their members only. This is highly undesirable. One can draw an analogy with the medical profession where for years those enjoying the state guaranteed markets ridiculed alternative forms of medicine. Now even conventions science has confirmed that acupuncture, herbs and alternative medicine have considerable merit. The further conferment of monopolies upon the members of the CCAB bodies has not economic, moral or ethical basis.

• The accountancy profession’s rules are discriminatory. They favour the individuals working in the public practice wing. The individuals working as public practitioners and wishing to work in industry/commerce do not encounter any additional professional restrictions. Thus someone can leave a firm and enter industry.  But individuals working in industry/commerce (even holding the most senior jobs) cannot enter public practice without demonstrating relevant experience in a firm.

• The  accountants working in public practice are required to undergo a programme of continuing professional education (CPE). However, to the best of my knowledge there are no equivalent requirements for those running the regulatory apparatuses.

• The assumed objective is to ensure that the knowledge base of professional accountants remains relatively up to date. However, such a claim must be doubted. Daily newspapers (reports of scandals) show that the failures of accounting and auditing knowledge are institutionalised. Yet this failed knowledge is perpetuated through professional education and CPE courses.

•  In reality, practitioners are required to attend technical courses organised (or sponsored) by the accountancy bodies. The focus on the ‘technical’ (e.g. new accounting standards, new laws) means that the accountants rarely understand the social and ethical aspects of their work. The focus on the technical also prevents accountants from understanding change (e.g. why do accounting standards change).

•  Most accountancy bodies abuse their position as providers of CPE courses. A number of practitioners have told me that on occasions the monitoring units (e.g. those monitoring the work of auditors) have found fault their work and then advised them to attend courses organised either by the accountancy body concerned or a party nominated by them. The CPE courses offered by the accountancy bodies are also very expensive. This is gross abuse of power.

•  Practitioners should be able to attend any suitable course of their choice. They might find it helpful to attend scholarly conferences, seminars or courses organised by non-professional bodies. In my view, the accountancy bodies should not control the provision of CPE. More competition will also drive down the price of CPE courses.

• Accountants in public practice enjoy the state guaranteed market of audit and insolvency guaranteed by the Companies Act 1985 and the Insolvency Act 1986. In addition, they are also able to perform ‘reviews’ for small and medium-size companies.

• Accountants are able to trade as sole traders, partnerships, limited liability companies and soon as limited liability partnerships.

• The ICAEW has placed restrictions on who can own an accountancy firm conducting an audit. We believe  (not certain) the requirement is that accountants should own 75% of an accountancy firm/company.

• The fees sharing arrangements are not known. Despite enjoying a state guaranteed market, accountancy firms have not been obliged to publish any meaningful information about their affairs. However, it has been reported that accountancy firms have been colluding and acting as a cartel. The Financial Times (22 Feb 2000, page 8) reported that " Italy's competition authority yesterday fine five leading  accountancy firms a total of L4.5 bn (£1.4m for anti-competitive practices between 1991 and 1998.  The competition authority said it was fining Ernst &Young, PricewaterhouseCoopers, Deloitte Touche Tomatsu, KPMG and Arthur Andersen for "consistently distorting market competition in Italian accountancy services", in particular by standardising prices and co-ordinated to win clients. PwC was formed by the merger of Price Waterhouse and Coopers & Lybrand in 1998.  The companies have all admitted the charges and provided information which helped the Italian competition watchdog in its inquiry. The antitrust body said that it had taken this into account when imposing the fines".

• The above ownership restrictions on the business structure do not make any sense, especially as accountancy and audit work does not form a major part of the Big Five firms. It is also akin to saying that chemists should have a major stake in a drug company.

• As accountancy firms are used to regulate global businesses (e.g. auditors of banks and financial businesses), their choice of the business vehicle should be determined by the regulatory objectives as well. Major accountancy firms should not be able to trade as partnerships.

•  It is not clear why the OFT permits accountancy firms to advertise themselves as 'global' whilst in order to avoid accountability, the same firms claim that they are not global.

• The structure of international accountancy firms is inappropriate and cannot give their clients (are they shareholders, companies, state regulators?) adequate protection or service (see Arnold and Sikka, 2000 for further details)

• The UK accountancy bodies do not prescribe any rules for charging though it controls the supply the individuals authorised to do certain types of work. The control of supply inevitably enables some to earn excessive economic rents.

• However, through their reluctance to persuade auditing firms to act exclusively as auditors (i.e. not sell non-auditing services to their audit clients) the accountancy bodies permit dilution of audits. In many cases audits are used as loss-leaders. Accountancy firms lowball audits in the hope of making a killing on the non-audit work (an allegation made by the recent ICAEW President, Chris Swinson, who complained when his firm lost the audit of RAC). This cross-subsidisation encourages unfair competition. The producers selling consultancy work only cannot compete accountancy firms as they do not have any loss -leaders. Audits also give accountancy firms easy access to top management. Consultancy firms cannot secure the same access with the same ease. This leads to unfair competition.

• The accountancy firms are some of the most secretive organisations. Little public information is available about their conduct. Some information about their rates can be found in the following places.

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?

• The restraint mentioned in 12 above is not considered to be onerous. The SEC in the USA is currently pursuing similar objectives.

• Scholarly research  ( for evidence see Simunic, 1980, 1984; Simon, 1985) shows that companies pay a higher price for audit and non-audit services when they buy them from the same producer compared when they are bought from two separate organisations. The ‘joint’ provision enables the sellers (i.e. accountancy firms) to charge exorbitant prices which cannot easily be unbundled.

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.

• Individuals from ethnic minorities are poorly represented (see Sikka, 2000 for details). No non-white person has ever been the chief executive, director or officeholder of any accountancy body.

• Most accountancy bodies are undemocratic. ACCA does not even have one-person-one-vote. Officeholders (or past officeholders) cast the largest number of votes and effectively “appoint” the Council. In May 2000, a former President of the ACCA cast some 18% of all the votes for council elections. By a coincidence (or otherwise) no non-white person was elected.

• The accountancy firms are major beneficiaries of the state guaranteed markets of auditing and insolvency. Yet they have failed to show that they have adopted 'equal opportunities' policies. None of the major firms have implemented any kind of ethnic monitoring policies (see Sikka, 2000).

• The decision-making power rests with the Councils of the accountancy bodies, but consumers of audit, insolvency etc. have no representation on them. 

• Most shun public accountability by keeping the public out of their meetings. The minutes of council meetings and agenda papers are not publicly available.

•  None of the accountancy bodies owes a 'duty of care' to the parties affected by their regulatory decisions.

• Following the implementation of the Human Rights Act 1998, many of the functions performed by the accountancy bodies are likely to be classified as 'public functions' and the bodies concerned will be classified as 'public bodies' . However, the accountancy bodies have little regard for the human rights. This disregard cannot advance the consumer of the public interests. For example, the Association of Chartered Certified Accountants (ACCA) operates a Code of Practice requires that all current and potential council members “refrain from making public pronouncements which are at variance with Council’s formal position even where that position may differ from their individual views” (part 8-vi of the Code). This is effectively a ‘gagging order’ and was not developed in any consultation with the public even though ACCA is a public body. It violates basic human freedoms as enshrined in the European Convention on Human Rights.

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.