EU inquires into the professions

The European Commission is launching a major investigation into the operations of the accountancy, legal and other professions to determine if charges are fair and regulatory structures appropriate. The latest investigation builds on provisional work conducted on behalf of the Commission over the last two years.

In relation to accountants, the Commission will consider whether there is sufficient competition between firms and whether accountants' professional bodies adopt rigorous and independent disciplinary standards. Philip Lowe, director-general of competition for the Commission, said in a newspaper interview that the investigation would be led by his directorate, with involvement from the Single Market Directorate to promote greater competition in the professional services.

It is clear that one concern of the Commission is that the collapse of Andersen may have left too few accountancy firms to provide an effective competitive system. One possible result of the investigation, Lowe speculated, was that mergers of mid-tier firms below the current €2bn threshold could in future require Commission approval. However, the logic of this seems peculiar as it risks undermining attempts by mid-tier firms to gain the strength through amalgamation to challenge the Big Four practices.

Competition commissioner Mario Monti explained the context of the Commission's approach to the accountancy and other professions earlier this year. He stated that one of the concerns was that information on what the professions did was 'asymmetric' - that the professional knew what was being done and what it was worth, but the consumer was in a position of weakness to assess this. Monti pointed out that while Spain, Denmark and the UK had reviewed professional self-regulation, some other member states had not.

Another priority, added Monti, was to increase cross-border trade in services, including professional services. While services represent 70% of EU GDP, they constitute a mere 20% of cross-border activities. If the Commission genuinely intends to influence cross-border trade in accountancy services this may appear to imply a major change in the regulatory structure of the profession.

The background to the latest investigation was provided by an earlier report, published in March, on the regulation of professional services. This concluded that some member states - including Germany, France and Italy - had a higher intensity of regulation of accountants than others - such as the UK. The report suggested that accountants may in some instances earn 'excess profits' because some member states' systems of regulation have the effect of limiting the number of practitioners, thereby enabling accountants to raise fees above what would otherwise be market levels.

The authors concluded that there was an inverse relationship between the degree of accountants' regulation and their productivity. But they also suggested that while lower levels of regulation could enable professional firms to operate in larger business units without leading to high market concentration, the single exception was in accountancy. This reinforces the perception that the Commission is very worried by high market concentration in the accounting sector.

As student accountant went to press, it was unclear how the latest Commission investigation will be structured. Crucially, it had not been announced whether all the professions would be examined by a single review team, or if the major professions would be evaluated simultaneously by separate expert groups. If all professions are treated together the risk is that there will not be sufficient attention to the differences that apply to each discipline.

Ross Midgley, ACCA's policy director, points out that a recent Office of Fair Trading (OFT) enquiry in the UK found little to criticise in the accountancy profession. "Admittedly, this took place before the demise of Andersens reduced the Big Five to the Big Four," he comments. "But one would think that the best chance of enhanced competition in the transnational audit sector would come through encouraging mergers among the mid-tier firms, not restricting them."

Peter Moizer, professor of accountancy at Leeds University, is sceptical that the Commission's investigation is likely to achieve much, especially if a broad brush approach is adopted. He suggested that a generic review of the professions might focus on matters such as the rules and disciplinary procedures of professional bodies, leading to requirements for neutral outsiders to be involved in disciplinary hearings.

A review is also likely to conclude that there should be mutual recognition of qualifications to assist professionals operating across borders. Moizer pointed out that past studies have found that while the big firms operate effectively across borders, there is little cross-border activity by small firms.