A Fair Trading Commission (FTC) study has concluded that there is little competition in the Jamaican market for auditing services, which is dominated by two big auditing firms.

The FTC study stated that the Jamaican market is best classified as a “tight oligopoly”, where the share of the market-controlled PricewaterhouseCoopers (PwC) and KPMG exceeds the commonly accepted oligopoly threshold of 60 per cent.

The FTC study provided an overview of the state of competition in the market for auditing services in Jamaica, focusing on trends in market concentration over the period 2013-2018.

The study found that the “Big 2 consistently generated in excess of 90 per cent of the audit fees for the industry. From the study it can be seen that the Big 2 are engaged in fewer audits but accounts for an increasing share of the revenue.”

Over the period of the study, PwC and KPMG were the consistent market leaders with respect to the number of audits conducted and the value of audits. Over the period of study, eight auditing firms entered the market and three exited.

While KPMG had more clients than PwC for every year of the study, PwC collected more audit fees than KPMG. Based on the audit fee ranking, PwC consistently earned annually at least $50 million more than its closest rival, KPMG.

In particular, KPMG had on average 33 per cent of the clients while PwC earned an average of 56 per cent of the auditing fees. The mean audit fee increased by 51.6 per cent compared with the average general inflation of 5.3 per cent over the same period.

According to the FTC study, “this increase could be as a result of the Big 2 auditing firms being able to charge more for their services to existing or new clients and/or Non-Big 2 auditing firms commanding a higher price for their services and/or attracting new clients. In the first instance, this could be a result of the Big 2 companies having market power and in the latter instance, it could be that there is an increase in the competitiveness of the market.”

The research team pointed out that, “a dominant firm usually has two effects on prices similar to those of pure monopoly. First, they raise the level of their prices, often (though not always) gaining excess profits. Second, they engage in price discrimination.”

The results show that clients rarely switched away from a Big 2 auditing firm to a non-Big 2 firm. Big 2 auditors are likely to gain larger clients from switching as evidenced by the four companies that switched from Non-Big 2 auditors.

Auditing services market in Jamaica may be susceptible

The results of this study suggest that the auditing services market in Jamaica may be susceptible, if not being subjected to the undue exercise of market power. The research team highlighted that, “further work is needed, however, to confirm this inference. In particular, a closer examination of the conditions of entry, expansion and exit is needed for the FTC to better understand and characterise the persistently high concentration levels observed in the market during the review period.”

By comparison, the audit fee market share gap between the Big 2 and other smaller firms grew wider over the six year period. This is demonstrated by comparing the market shares of KPMG, the smaller of the Big 2 and the other auditors.

KPMG had 27.3 per cent market share in 2018, which was over four times larger than the combined total of the non-Big 2’s market share (6.8 percent). BDO, the closest rival to the Big 2, held just under four per cent market share, indicating its weak position relative to the Big 2.

PwC’s share of audit fees increased by approximately 15 percentage points over the period. Contrastingly, KPMG’s market share declined by 12 percentage points.

Ernst & Young not a significant player in the market

The study unearthed that Ernst & Young, which traditionally a member of the Big 4, was not a significant player in the market. Ernst & Young highest market share over the period was six per cent in the first year of the study in 2013.

Ernst & Young having entered this market in 2001, lost its status as the number three audit firm to BDO in 2015. Over the period, Ernst & Young averaged three per cent of the audit fees collected.

BDO, at its peak in 2018, accounted for four percent of audit fees collected. Observations of movement in the market at the exit of a rival can give some insight as to the competitiveness of the market.

In the wake of Deloitte’s exit in 2013, KPMG saw a three-percentage point increase in audit fees collected. Meanwhile, PwC saw a one-percentage point decrease in its audit fees collected.

The non-Big 2 companies saw a two-percentage point decrease in the audit fees collected. These differences could be attributed to the exit of Deloitte but are more likely due to the 10 per cent increase in the number of clients.