Irish Competition Authority Decisions

1. Notification was made of an arrangement by the Institute of Chartered Accountants in Ireland on 30 September 1992 with a request for a certificate under Section 4(4) of the Competition Act, 1991 or, in the event of a refusal to issue a certificate, a licence under Section 4(2) of the Act.

2. The notification concerns the Bye-Laws of the Institute. In addition, there are two related notifications relating to the Rules of Professional Conduct of the Institute (CA/827/92) and the Ethical Guide for Members of the Institute (CA/828/92). The three notifications deal essentially with the professional rules and guidelines for members of the chartered accountancy profession in Ireland as well as with the internal organisational rules of the Institute itself.

3. The Institute of Chartered Accountants in Ireland (ICAI) was established by Royal Charter on 14 May 1888. In 1997 it had a membership of the order of 10,000 and 2,300 students. Membership had been growing at a rate of 5% p.a. in the years up to 1997, as illustrated by the figures below.

1990 7,181 2,200

1992 7,982 2,200

1995 9,500 2,500

1996 9,900 2,300

1997 10,400 2,500

4. The parties stated that the recruitment of trainees had been running at 600 to 700 per annum in recent years. Every person of satisfactory educational standard who obtains a training place in any of the 526 training firms approved by the Institute is accepted as a student and can sit the Institute's examinations leading to membership.

5. The parties claimed that the mission of the Institute is to enhance business performance through providing accounting and financial knowledge and services of the highest professional standards delivered with integrity. The Institute is dedicated to leading and promoting Chartered Accountancy, assuring quality to the public and achieving excellence in education and in support of its members. The Institute pursues this mission through a combination of the following measures:-

- The education, training and qualification of prospective chartered accountants.

- The support of members through services such as continuing professional

development, technical advice and practice review.

- The maintenance of high professional standards among members by

regulation.

- The representation and advancement of members ’ interests in public policy

issues.

6. The parties claimed that the relevant market is the provision of accountancy related-services in Ireland. Within this general market there is an important distinction between two broad categories of work carried out by chartered accountants: (i) the statutory audit of company accounts, which may only be carried out by registered members of approved bodies and (ii) general work of a financial nature carried out on behalf of industry, financial services, the public sector or other sectors, which work draws considerably on the professional training and expertise of chartered accountants but which is not necessarily confined by statute or regulation to any one professional discipline. To illustrate this point, the parties claimed that some 60% of the current active membership of the Institute work in business as opposed to being in professional practice.

7. The statutory audit market is regulated by a combination of (i) EU law, (ii) domestic statute and (iii) professional rules of conduct. At EU level, the Eighth Company Law Directive (84/523/EEC) lays down criteria in relation to education and training of accountants, certain requirements in relation to standards of ethics, codes of conduct and practice, independence, professional integrity, technical standards and disciplinary procedures, to be observed by recognised bodies and by authorised personnel in undertaking audit work in all Member States. The parties drew the Authority’s attention to the provision in Section II (“Rules on approval”) and Section III (“Professional integrity and independence”). The parties stated that the Eighth Directive has been transposed into Irish law by the Companies Act, 1990 (Sections 187-191) and by the Companies Act 1990 (Auditors) Regulations, 1992 (SI No. 259 of 1992). Prior, and in addition, to these EU requirements, Sections 147-164 of the Companies Act, 1963 provide for the proper keeping of accounts and the audit of company accounts, as well as the appointment of auditors and the qualifications required for such appointment. Section 162 of the 1963 Act, in particular, provides that, amongst other things, “ a person shall not be qualified for appointment as auditor of a company or as a public auditor unless- (a) he is a member of a body of accountants for the time being recognised for the purpose of this section by the Minister ..........”

8. The parties claimed that there are six professional bodies of accountants in Ireland. These are:-

1. The Institute of Chartered Accountants in Ireland (ICAI)

2. The Association of Chartered Certified Accountants (ACCA)

3. The Institute of Certified Public Accountants in Ireland (ICPA)

4. The Chartered Institute of Management Accountants (CIMA)

5. The Institute of Incorporated Public Accountants (IIPA)

6. The Chartered Institute of Public Finance and Accountancy (CIPFA).

The first four bodies are long-established and together they form the Consultative Committee of Accountancy Bodies of Ireland (CCABI). The first three bodies are recognised accountancy bodies for the purposes of Section 162 of the 1963 Act and Section 190(1) of the Companies Act, 1990. The members of the fourth body, the chartered Institute of Management Accountants, do not audit the accounts of companies, but rather work mainly as professional accountants within companies. That body has not sought recognition under Section 190(1) of the 1990 Act. The members of the Chartered Institute of Public Finance and Accountancy work primarily within the public sector, are relatively few in number and also do not audit the accounts of companies. The fifth body - the Institute of Incorporated Public Accountants - was first recognised for audit purposes under the Companies Acts in 1996. This recognition is the subject of judicial review proceedings at present. The IIPA is believed to have less than 100 members registered as auditors. The parties claimed that, for all practical purposes, the first three bodies represented the overwhelming majority of qualified auditors within the State and they had set the standards and rules of conduct and performance required of an auditor.

9. The parties estimated that there are approximately 11,000 professional accountants active in the State, of which the ICAI accounts for 60%. (Almost 4,000 of ICAI's members are in Northern Ireland, Great Britain or overseas).

10. On the demand side of the market, the customers are all companies, individuals and other organisations throughout the State which require statutory audit services or more general business advisory services entailing expertise in accountancy matters. The latter services are provided by accountants either as employees within business, or as consultants/advisors in a professional-client relationship.

11. The parties estimated that the total income generated by the provision of accountancy services on a professional basis within the State is in excess of £400 million, of which over 80% accrues to chartered accountants.

12. The parties stated that the audit and general accountancy markets can be seen as two broad areas of work within the accountancy profession. From the consumer’s perspective, the demand for audit services is distinct from the demand for general accountancy services and they are clearly non-substitutable. Audit is a statutory responsibility that firms have to meet under the Companies Act. However, the audit work of firms and general accountancy work are very good substitutes in supply, in that a given chartered accountancy firm can easily shift resources to increase its audit capacity at the expense of its general accountancy side of its business. Furthermore, with the increasing importance of consultancy to the fee income of chartered accountants, the audit function of firms gives them a competitive advantage in competing for lucrative consultancy work [1]. Thus, the Authority considers that the audit market does not constitute a separate market in the case of chartered accountancy firms; the relevant market is the market for accounting services, including audits, in the State.

13. A cursory glance at Table 1 shows that the big-5 firms dominate the landscape in terms of fee income, with 76% of the fee income of the top 22 firms in the State.

14. With the merger of PriceWaterhouse and Coopers & Lybrand, which was given regulatory approval in May of 1998 [5], the big-6 has become the big-5. As many of the firms just outside the top six are allied with international firms, there are continuing opportunities for lower ranking firms to expand. Smaller companies are more likely to rely on smaller accountancy firms to perform their audits.

15. In recent developments, the ICAI was reported in April 1998 to have withdrawn the audit registration of two firms for failure to hold the required professional indemnity insurance. The ICAI is presently conducting an investigation into possible breaches of professional misconduct by firms named in the McCracken Tribunal. At the outset of this investigation, in October 1997, Section 192(2) of the Companies Act, 1990 was invoked by the Tanaiste to require the Institute to allow representatives from the Department of Enterprise, Trade and Employment to attend the proceedings. This amendment is to be extended to all accountancy bodies and means that representatives of the Department must be granted unrestricted access to any committee of inquiry established by any of the accountancy bodies. In response to the affair, the ICAI announced in May 1998 that its disciplinary procedures will be more open and transparent. These changes were approved at the ICAI’s council meeting on the 15 May 1998 and the ICAI is now seeking approval of its membership before it implements the changes.

16. The bye-laws set out in detail the internal rules of the Institute. The parties submitted that most, if not all, of them had little or no affect on the application of competition law to the accountancy profession in Ireland. They relate to such matters as the status and rules for elections to the Council of the Institute, the conduct of Council proceedings, the conduct of general meetings, the setting and conduct of Institute examinations etc. The parties stated that among the provisions which may be of interest to the Authority are the following:

- The Council has power to decide conclusively on applications for membership of the Institute and, if granted, the appropriate class or category of membership. Applications are considered on the basis of fulfilment of the bye-law requirements and evidence of fitness for admission (bye-law 35).

- All students wishing to become members of the Institute are required to have served under a training contract for a period, or periods, of approved training as specified by the Council in a member firm designated by the Council as a recognised training firm. The Council has power to prescribe conditions for approval of training terms and all other matters relating to the training of students. Any member who feels aggrieved by a decision of the Council in exercising this function has a right to request a review and to make oral and written representations on his or her behalf (bye-law 43).

- The disciplinary measures which may be invoked against members or students relate exclusively to matters of professional conduct, general observance of the bye-laws and solvency (bye -law 61).

17. The Institute is the professional organisation responsible for all chartered accountants in the State. As such, it constitutes an “association of undertakings” within the meaning of Section 4 of the 1991 Act, although it should be acknowledged that it is in a special category of “association” by virtue of its professional character and its obligation, which derives from statute as well as from its professional status, to ensure that proper standards are established and upheld. The parties argued that the three notifications should be considered together by the Authority.

18. The parties claimed that the rules and guidelines which are the subject of the three notifications represent a “decision of an association of undertakings” for the purpose of Section 4 of the Competition Act, 1991. This view is in keeping with EU case law under Article 85 of a Treaty of Rome [6] and, indeed, with the Competition Authority's own thinking on such arrangements, as indicated in its Decision No. 16 - Association of Optometrists .

19. The parties claimed that the general case law on competition and professional organisations can be summarised, for present purposes, as follows. Those activities of a professional organisation which deal with such matters as establishing and upholding professional standards by rules on training, registration of members, codes of conduct, disciplinary measures etc. do not infringe competition law provided they are confined to realising these objectives, are based on objective qualitative criteria and are not deployed in a manner which could give rise to a restriction of competition. In this regard, for example, criteria for membership should be based on reasonable, objective standards. There should be no suggestion that membership rules are used to limit artificially the number of members or to make access more difficult purely for commercial reasons. Rules of conduct should be designed solely to uphold the professional integrity of members and of the overall profession itself, and should not be a means of co-ordinating the competitive behaviour of members. For example, there should be no suggestion or evidence of imposing or recommending fee levels, minimum fees, allocating or sharing customers, co-ordinating marketing strategies etc.

20. The parties claimed that each of the present notified arrangements satisfied these criteria. The arrangements are limited to discharging the Institute's statutory responsibility to uphold standards of audit of companies, to promoting general professional standards of accountancy practice in the business world and to advancing the collective interests of Institute members. The individual members of the Institute retain complete freedom to decide on their competitive policies on matters such as pricing, marketing services etc.

21. There is no suggestion of the Institute attempting to co-ordinate these activities. Rules on access to membership are based exclusively on meeting certain prescribed educational and professional standards. There is no question of any quantitative limit being imposed on membership, as is evidenced by the figures in membership numbers in recent years.

22. Accordingly, the parties submitted that the notified arrangements do not prevent, restrict or distort competition in the provision of accountancy services in the State or in any part of the State and that a certificate should be granted by the Authority.

23. The arrangements have not been notified to the European Commission pursuant to Article 85 of the EEC Treaty. Nor are they the subject of competition law proceedings in any jurisdiction.

24. There were no submissions by third parties.

25. Section 4(5) of the 1991 Act provides that, before issuing a Certificate, “ the Authority may invite any Minister of the Government concerned with the matter to offer such observations as he may wish to make ”. The Authority considers that the Tanaiste, in her capacity as Minister for Enterprise, Trade and Employment, is such a Minister, vis-à-vis the Institute of Chartered Accountants, and sought any such observations. The reply received raised no substantive issues under the Competition Acts.

26. Section 4(1) of the Competition Act states that “all agreements between undertakings, decisions by associations of undertakings and concerted practices, which have as their object or effect the prevention, restriction or distortion of competition in goods or services in the State or in any part of the State are prohibited and void”. A significant number of ICAI members are self- employed (40% of the members are in professional practice) and as such are considered by the Authority to be undertakings. Consequently, the Authority considers that the ICAI is an association of undertakings within the meaning of Section 4(1). The ICAI was established under a Royal Charter of Incorporation in May of 1888, as amended by the Institute of Chartered Accountants in Ireland (Charter Amendment) Act, 1966. The Authority is of the opinion that, although the Institute is enabled by statute to make bye-laws, and although they must be allowed by the Government, it is implicit that the power to make them should be carried out in accordance with law, including the Competition Acts.

27. In terms of membership bye-laws that regulate entry into the Institute, the authority notes the following:

Bye-Law 33 : “... a person shall be eligible to be admitted to membership as an Associate only if he is a student who has obtained the requisite period of approved service applicable to him under the regulations from time to time issued by the Council and has passed such examination or examinations as the Council may from time to time prescribe or approve, including a final examination set by the Institute.”

Bye-Law 43 : “All students wishing to be come members of the Institute will be required to have served under a training contract for a period, or periods, of approved training as specified by the Council in a member firm designated by the Council as a recognised training firm.

Subject to the prior consent of the Council, a student shall have the right, exercisable once only, to terminate his training contract without the approval of his recognised training firm and to enter into a new contract with another recognised training firm for the balance of the training term provided for in the original contract.”

Bye-Law 44 : “The Council shall from time to time make regulations prescribing the examinations of the Institute and the parts (if any) into which such examinations are to be divided, the syllabuses therefor, and courses to be attended therefor, the times at which the examinations may be taken and the fees therefor, the period within which any examinations must be passed, the number of times a person may sit for one examination, any exemptions or concessions which may be granted or allowed and all other matters incidental to the holding of such examinations.”

28. These bye-laws regulate entry into the Institute. The Authority considers that controlled entry into a profession does not contravene Section 4(1) as long as the effect of such restrictions is not to control artificially the numbers entering the profession. In the years 1995 to 1997, the Institute took in 584, 640 and a record number of 762 students respectively. These intake figures show the pro-cyclical nature of student intake, as the 526 practising firms who are approved to train students are expanding student intake in response to the strong growth in the economy. Most students enter the Institute from third level colleges (93%) and proceed to take professional examinations two and three, and the final admitting examination. In 1997, 78% of all attempts at final examinations passed the exams, 59.5% of attempts at professional three exams were successful and 79% of attempts at professional two examinations were successful. Probability analysis indicates that, at minimum, 37% of students (who enter the profession with professional examinations one equivalent) successfully complete all examinations, and that the probability of successfully becoming an Associate (conditional on being accepted with professional one equivalent qualifications) is quite high.

29. In 1996, 526 firms were ICAI-approved training firms, an increase of 17 over 1995. In 1996, 558 students passed their final examinations, which represents some 5% of the total number of chartered accountants (the corresponding figures in England/Wales were 2,668 and 2.4% respectively). This growth, if maintained over the next decade or so, will lead the number of chartered accountants in Ireland to double in 12 years.

30. The intrinsic link between the willingness of firms to take on trainees and entry into the profession is a standard feature of most professional and trade training. This makes the throughput of qualified persons procyclical with a lag. In lean times, firms are less willing to train trainees, as it is presumably a costly process. The tying of the trainee to a particular firm is motivated by the high transferability of the general skills acquired by the trainee and enables the training firm to capture some of the benefits of the training. The Authority believes that restrictions on the number of times that a student may change training firms increases the incentive for firms to take on trainees and does not contravene Section 4(1).

31. Although the number of trainees taken on is decided at the level of the individual training firm, and so moves procyclically, the number of students passing examinations is a decision taken at the level of the Institute. The Authority considers that it is imperative that the pass rates, for all Institute examinations, do not regulate the numbers of candidates entering the profession. The Authority particularly welcomed the statement by Mr Ben Lynch (Director of Education and Training, ICAI) in Accountancy Ireland (the ICAI journal), in commenting on the Review Group which presented its report to Council in the Summer of 1994:

The Authority notes the general upward trend in final examination pass rates and welcomes the Institute’s statements on the regulation of numbers entering the profession. The Authority would regard any position, other than that taken by the Institute, on the control of entry into the profession, as contravening Section 4(1) of the Act. That said, the Authority has no evidence that entry into the ICAI is regulated in a manner which contravenes Section 4(1).

32. Further bye-laws regarding membership are bye-laws 35 (c) and 35 (d). Under bye-law 35 (c) “the Council may in its absolute discretion (by a resolution by not less than two-thirds of the members present and voting thereon) refuse to admit any person to membership if it considers him not to be a fit and proper person to be so admitted.” The Authority accepts that the intent of this bye-law is to ensure the integrity of members, and it considers that the discretion to refuse membership into a professional body does not contravene section 4(1) of the Act, as long as what constitutes a fit and proper person is reasonable and is not used to control artificially the numbers entering the profession.

33. Under bye-law 35 (c) “the Council may, in its absolute discretion, admit any person to be a member notwithstanding any informality in his training contract or his service thereunder.” The Authority considers that this bye-law is pro-competitive, in that it allows students to become members in exceptional circumstances (once they have successfully completed all the examinations).

34. The issue of discipline is covered by bye-laws 61 to 74, which deal with areas such as misconduct, incompetence, dishonesty and fraud. The Authority has confined itself to considering whether these bye-laws, their intent and application, raise issues under the Competition Acts, and is satisfied that they do not do so.

35. In the Authority’s opinion, the Institute of Chartered Accountants in Ireland is an association of undertakings within the meaning of Section 3(1) of the Competition Act, 1991, and the notified arrangements constitute a decision by an association of undertakings. In the Authority’s opinion, the Bye-Laws do not contravene Section 4(1) of the Act.

36. The Competition Authority has issued the following certificate:

The Competition Authority certifies that, in its opinion, on the basis of the facts in its possession, the Bye-Laws of the Institute of Chartered Accountants in Ireland notified under Section 7 of the Competition Act, 1991, on 30 September 1992 (CA/826/92E), do not contravene Section 4(1) of that Act.

[1] In the Economist October 25 1997, it is stated that 33% of the world-wide fee income of Ernst & Young and KPMG was accounted for by their consultancy arms and that this area of their business was growing at twice the rate of their fees from tax and auditing. This can lead to arguments over corporate governance, as witnessed by the dispute between the accountancy and consulting arms of Arthur Andersen ( London Times , 18/12/1997).

[2] The market share data relates to the percentage of the market held by the largest 22 firms.

[3] In March of 1998 Grant Thornton merged with Lane Daly & Partners.

[4] In January of 1998 Rawlinson Hunter Mazars merged with Chapman Flood

[5] In Table 1 the figures for the merged firm relate to the year ending in June 1997.

[6] See, for example, Bellamy & Child Common Market Law of Competition Fourth Edition, paras 2-031 to 2-033, 4-025 and 4-084 to 4-087, as well as Chapter 4 more generally).