Audit Choice

I've written a policy paper to contribute to the public consultation on audit choice, called "Sharpening the Thinking on Competition and Choice in the UK Audit Market"(.pdf). Here's the executive summary:

This policy paper contributes to the public discussion facilitated by the Financial Reporting Council (FRC) concerning levels of competition and choice within the UK audit market. It specifically responds to the Oxera report that launched the debate, and applies economic theory to the complexities of the audit market to make two key points: that the notion of a “Big Four” is a mirage; and that the audit market is competitive (regardless of concentration or switching rates). Despite this the paper suggests broad institutional reforms that could make the market function more smoothly: permit cross-ownership; reduce the geographical basis of regulation; relocate the burden of large-scale risk; and pursue measures to get company information into the public realm.

My motivation for contributing was to illustrate why a reduction in choice doesn't necessarily mean a reduction in competition, and therefore the whole debate was grounded on a misinterpretation of competition theory. My intention was to illustrate the inconsistency at the heart of those seeking more regulation, by making the case of competition as a rivalrous process. Yes, the market (but not the industry) is concentrated but that only affects choice, not competition. In other words, the original issue of choice and competition is misguided, and fears over competition should be dropped. So I'm delighted that the debate does indeed seem to have shifted from the initial remit:

The Financial Reporting Council (FRC) and the Department of Trade and Industry (DTI) have today published a study jointly commissioned by them, “Competition and choice in the UK audit market”.

to how it's since been portrayed in The Economist's review of the public debate:

The worries that emerged this week were about choice.

If my paper played a small part in this I'm delighted to have picked off some low hanging fruit. As Pete Boettke says:

Most public policy discussions are really about basic economics.  If we just got rid of the policies that cut against basic economics, then the lives of millions would be improved around the globe. . . . If only we could pick off the low hanging fruit of public policy, then much misery would be avoided.