The Big Four auditors will be stripped of their oligopoly of the audit market due to findings in an eight month investigation, including one showing that the breakdown of dialogue between bank auditors and regulators made the financial crisis worse.

The House of Lords Economic Affairs Committee has blasted audit firms’ “complacency” and “dereliction of duty”, which it said contributed to the economic downturn.

The oligopoly limits competition and choice, the statement read, and with only three of the Big Four active, there is a risk of an “unacceptable degree of market concentration” should one of the Big Four leave.

The Office of Fair Trading has been urged to hold a detailed investigation into the audit market with the potential for an inquiry by the Competition Commission. Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers (PwC), have a global reach that goes beyond the scope of national authorities, but believes that the UK should take a lead since London is a major global financial centre.

Auditors, the Committee said, were either blissfully unaware of the mounting dangers in the banks or they simply failed to alert the supervisory authority. Legislation is necessary, therefore, to re-establish mandatory two-way confidential dialogue between bank auditors and supervisors to help avoid a similar crisis in future.

Audit standards are also slipping, said the Committee, which heard that International Financial Reporting Standards (IFRS) had lowered audit standards. Box-ticking and a reduced scope for auditors to exercise judgements to reach a true and fair view have been encouraged, and as a result the Committee recommends that prudence be reasserted as the guiding principle of audit.

“Our inquiry has revealed widespread concerns about the Big Four’s dominance and the risk that they could become the Big Three,” explained Committee chairman, Lord MacGregor of Pulham Market. “Our report makes several recommendations to reduce this dominance but we feel that this market concentration is of such significance that a thorough review of the issues by the Office of Fair Trading and possibly the Competition Commission is now overdue. Equally important is our support for regular meetings between auditors of financial institutions and regulators to avoid the serious failures of communications between the two which were so starkly revealed by the evidence to us and which contributed to the financial crisis,” he said.

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