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1. Introduction
We are an oligopoly - that is undeniable […] I can’t believe the industry will be the same [in the future]. We have to reduce the level of conflicts and […] demonstrate why they are manageable and why the public and all stakeholders should trust us.
Bill Michael, Chairman, KPMG UK[1]
New EU regulation on the statutory audit of public interest entities (PIEs) requires the mandatory rotation of audit firms and restricts the non-audit services and fees provided and charged by audit firms to all PIEs. According to EU legislation, a “Public Interest Entity” or “PIE” is defined as: entities whose transferable securities are admitted to trading on a regulated market; credit institutions; insurance undertakings; and entities designated by Member States as PIEs[2]. While these regulatory changes aim to reduce concentration and improve audit competition and choice, their success and impact depends on the definition of a PIE applied across the various EU Member States. Although their governance and performance is crucial for economic growth[3] (Langli and Svanström, 2013), the majority of private companies within the UK fall outside the narrow scope of the definition of a “PIE” and, therefore, are not covered by these regulatory changes.
The adverse effects of high levels of supplier concentration on audit competition and audit quality is a recurring issue raised by regulators and academics (Francis et al., 2013), with particular attention given to the audit market share held by the Big Four accounting firms. For publicly listed companies, the Big Four audit firms have an average market share of over 90 per cent in most EU member states (ESCP Europe, 2011). Likewise, in the UK, the Big Four increasingly dominate the audit market of large listed companies, where they are responsible for over 95 per cent of audits for the FTSE 350, and all but one of the FTSE 100 companies (Oxera, 2006). In addition to the potential for systemic risk resulting from high concentration levels, such a market is often characterised by an infrequent number of auditor switches and overfamiliarity between clients and their auditors, raising concerns over the quality of individual audits. Consequently, the European Commission (EC) implemented a new EU regulatory framework in 2014 in response to an extensive consultation process, which...