Profitability parts one and two
Deloitte’s response to the Competition Commission's working papers
Deloitte’s response comments on the following areas:
- Profitability and risk
- Reviewing measures of profitability
- Sales-based profitability metrics
As part of its investigation into the reference market, the CC has considered different methodologies to establish whether unduly high profits are being made. It has concluded (and we agree) that it cannot reliably assess economic profits and whether profits are being made in excess of cost of capital. However there is a wide range of other data points on profitability together with appropriate benchmarks relating to unambiguously competitive markets available to the CC which provide persuasive evidence that the levels of profits generated in the reference market are not unduly high.
This evidence must be appropriately taken into account by the CC. This is exactly the type of situation envisaged by the CC’s guidance where such evidence is appropriate. Moreover, the CC has already indicated that it agrees that this evidence supports the view that audit is competitive, as long as it is clear that audit work is no less risky than non-audit work. The evidence very clearly shows that, if anything, it is more risky.
For all of these reasons, the only reasonable and properly evidenced conclusion open to the CC is that profits in the FTSE 350 statutory audit market are not unduly high.