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Irish Competition Authority Decisions
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Cite as: [2000] IECA 584

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Institute of Chartered Accountants in Ireland/ Rules of Professional Conduct/ Ethical Guide for Members [2000] IECA 584 (18th September, 2000)









COMPETITION AUTHORITY



Competition Authority Decision of 18 September 2000 relating to a proceeding under Section 4 of the Competition Act, 1991.






Notification No. CA/827/92E - Institute of Chartered Accountants in Ireland/ Rules of Professional Conduct

Notification No. CA/828/92E - Institute of Chartered Accountants in Ireland – Ethical Guide for Members





Decision No. 584



Price £1.50
£2.00
Competition Authority Decision of 18 September 2000 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No. CA/827/92E - Institute of Chartered Accountants in Ireland/ Rules of Professional Conduct

Notification No. CA/828/92E - Institute of Chartered Accountants in Ireland – Ethical Guide for Members

Decision No. 584

Introduction

1. Notification was made of arrangements 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.

THE FACTS

(a) Subject of the Notification

2. The Notifications the subject of this Decision concern the Institute’s Rules of Professional Conduct (CA/827/92) and Ethical Guide for Members (CA/828/92E). In addition, the Institute notified its Bye-Laws (CA/826/92) [1]. The three notifications together dealt 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.

(b) The Parties Involved

3.1 The Institute of Chartered Accountants in Ireland (ICAI) was established by Royal Charter on 14 May 1888. In 1999, it had a membership of over 11,000 and 2,600 students. Membership has been growing steadily, as illustrated by the figures below.

Members Students
1990 7,181 2,200
1992 7,982 2,200
1995 9,500 2,500
1997 10,400 2,500
1999 11,200 2,600

3.2 While the recruitment of trainees had been running at 600 to 700 per annum in recent years, this increased to 820 in 1999. Every person of satisfactory educational standard who obtains a training place in any of the 588 training firms approved by the Institute is accepted as a student and can sit the Institute's examinations leading to membership.

3.3 The Institute’s mission was stated to be “ to enhance business performance through providing accounting and financial knowledge and services of the highest professional standards, delivered with integrity ”. The Institute was dedicated to leading and promoting Chartered Accountancy, assuring quality to the public and achieving excellence in education and in support of its members. It pursued this mission through a combination of the following measures:-


- 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.

(c) The Products and the Markets

4.1 The Institute claimed that the relevant market was the provision of accountancy- related services in Ireland. Within this general market there was an important distinction between two broad categories of work carried out by chartered accountants: (i) the statutory audit of company accounts, which could 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 drew considerably on the professional training and expertise of chartered accountants, but which was not necessarily confined by statute or regulation to any one professional discipline. To illustrate this point, the Institute claimed that some 60% of its current active membership worked in business, as opposed to being in professional practice.

4.2 The Institute stated that the statutory audit market was 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) laid 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 Institute drew the Authority’s attention to the provision in Section II (“ Rules on approval ”) and Section III (“ Professional Integrity and Independence ”). The Eighth Directive had 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 provided 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, provided 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 .................”.

4.3 The Institute stated that there were six professional bodies of accountants in Ireland. These were:-

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 (ICPAI)
4. The Institute of Incorporated Public Accountants (IIPA)
5 The Chartered Institute of Management Accountants (CIMA)
6. The Chartered Institute of Public Finance and Accountancy (CIPFA).

4.4 The first three bodies were long-established and, together with the Chartered Institute of Management Accountants, they formed the Consultative Committee of Accountancy Bodies of Ireland (CCAB-I). The first three bodies were recognised accountancy bodies for the purposes of Section 162 of the 1963 Act and Section 190(1) of the Companies Act, 1990 [2]. The fourth body - the Institute of Incorporated Public Accountants - was first recognised for audit purposes under the Companies Acts in 1996. This recognition had been the subject of judicial review proceedings.

The members of the Chartered Institute of Management Accountants did not audit the accounts of companies, but rather worked mainly as professional accountants within companies. That body had not sought recognition under Section 190(1) of the 1990 Act. The members of the Chartered Institute of Public Finance and Accountancy worked primarily within the public sector, were relatively few in number and also did not audit the accounts of companies. The Institute 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.

4.5 The Institute estimated that there were approximately 15,000 professional accountants active in the State, of which the ICAI accounted for about 50%. (Approximately 4,000 of ICAI's members were in Northern Ireland, Great Britain or overseas).

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

4.7 The Institute estimated that the total income generated by the provision of accountancy services on a professional basis within the State was approx. £500 million, of which over 80% accrues to chartered accountants.

(d) Structure of the Market

5.1 The Institute stated that the audit and general accountancy markets could be seen as two broad areas of work within the accountancy profession. From the consumer’s perspective, the demand for audit services was distinct from the demand for general accountancy services and they were clearly non-substitutable. Audit was a statutory responsibility that firms have to meet under the Companies Act. However, in the Authority’s view, 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 the 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 [3].

  1. A cursory glance at Table 1 shows that five firms dominate the landscape in terms of fee income, with 77% of the fee income of the top 20 firms in the State.





Table 1: Estimated Fee Income of Top 20 Firms in the State 1999
Firm
1999 IR£M
Market Share
(i.e. share of income of top 20 firms)
Price Waterhouse Coopers
78.00
24.22%
KPMG
65.60
20.25%
Arthur Andersen
37.50
11.65%
Ernst & Young
34.00
10.56%
Deloitte & Touche
33.00
10.25%
BDO Simpson Xavier
18.03
5.60%
Grant Thornton Group
10.00
3.11%
Oliver Freaney
6.84
2.12%
Chapman Flood Mazars
6.00
1.86%
Farrell Grant Sparks
5.35
1.66%
IFAC Accountants
4.79
1.49%
Bastow Charlton
3.95
1.23%
Pannell Kerr Foster
3.30
1.02%
Russell Brennan Keane
3.15
Under 1%
VF Nathan & Co
2.57
do.
O'Connor Leddy Holmes
2.27
do.
Ormsby and Rhodes
2.01
do.
O'Hare & Associates
1.95
do.
Hopkins O’Halloran Grant
1.86
do.
Ryan Glennon & Co
1.85
do.
TOTAL
322.02
c.100.00%
Source: Finance magazine, September 1999.

5.3 As many of the firms just outside the top five are also 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.

5.4 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 conducted 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 was to be extended to all accountancy bodies and meant 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 would be more open and transparent. These changes were approved by the ICAI's membership at a Special General Meeting in February 1999, revised Bye-Laws were approved by the Irish Government and the Privy Council in Northern Ireland accordingly, and these have been in operation since early 2000.

(e) The Notified Arrangements

6.1 The Institute submitted that the Ethical Guide was an aid to members in the identification of occasions where they might be at risk of failing to recognise or conform to the professional standards required of all members. It took the form of a reiteration of Fundamental Principles and Statements elaborating on the behaviour required of members in specified situations in order to uphold those Principles. Examples of typical situations dealt with were insolvency practice, conflicts of interest, confidentiality, dealing with threatened litigation, obtaining professional work, how to deal with offers of hospitality which might threaten or be perceived to threaten professional objectivity, etc. The Institute claimed that the sole overriding concern throughout the Guide was to assist members to uphold professional integrity. In Statement No. 10 on Fees, for example, the Institute confined itself to elaborating on members’ entitlements to charge fees, the advisability of clearly establishing the basis for fees in advance with clients, the customary criteria for setting fees where a basis had not been agreed with a client, handling fee information and disputes with clients etc. The Institute asked the Authority to note that the former expressly disavowed any intention to prescribe or recommend charge-out rates.

6.2 The Institute claimed that the Rules of Professional Conduct were binding on all members and students of the Institute. They were designed to ensure that the principles which were fundamental to the professional standing of chartered accountants in the business world were implemented and that the public interest was protected. These principles, which were described in sections 101 to 104 under the heading “Fundamental Principles”, related exclusively to questions of integrity, main professional standards and looking after the interests of clients and employers. Among the matters covered were -

- The duty of a member, before accepting any professional assignment or occupation, to make all reasonable and necessary enquiries to ensure that the assignment will not reflect adversely upon his/her integrity and objectivity. Where a member was about to accept an appointment in public accounting, thereby replacing another public accountant, there was an obligation on him to communicate with the latter to enquire whether there were any circumstances which should be taken into account in deciding whether or not to accept appointment (Rule 401).

- All members in practice and resident in the State were obliged to ensure that their firm complied with the professional indemnity insurance regulations. These included an obligation to take those steps that could reasonably be expected to ensure that the firm was able to meet claims against it arising out of professional business, to arrange insurance cover within specified limits, and to effect insurance through policies which met the criteria of Qualifying Insurance (Rules 500 to 533).

(f) Submissions by the Notifying Party

7.1 The Institute stated that it was the professional organisation responsible for all chartered accountants in the State. As such, it constituted an “association of undertakings” within the meaning of Section 4 of the 1991 Act, although it should be acknowledged that it was in a special category of “association” by virtue of its professional character and its obligation, which derived from statute as well as from its professional status, to ensure that proper standards were established and upheld. The Institute argued that the three arrangements originally notified should be considered together by the Authority.

Arguments in support of request for the issuing of a Certificate

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

8.2 The Institute claimed that the general case law on competition and professional organisations could be summarised, for present purposes, as follows. Those activities of a professional organisation which dealt with such matters as establishing and upholding professional standards by rules on training, registration of members, codes of conduct, disciplinary measures etc. did not infringe competition law provided they were confined to realising these objectives, were based on objective qualitative criteria and were not deployed in a manner which could give rise to a restriction of competition. For example, 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. Also, there should be no suggestion or evidence of imposing or recommending fee levels, minimum fees, allocating or sharing customers, co-ordinating marketing strategies etc.

8.3 The Institute claimed that each of the notified arrangements satisfied these criteria. The arrangements were 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 retained complete freedom to decide on their competitive policies on matters such as pricing, marketing services etc.; there was no suggestion of the Institute attempting to co-ordinate these activities.

8.4 Accordingly, the Institute submitted that the notified arrangements did 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.

Arguments in Support of Granting a Licence

9.1 The Institute claimed that a licence only arose if, and to the extent that, the notified arrangements were deemed to restrict competition contrary to Section 4(1) of the 1991 Act in the first place. The Institute claimed that there was no restriction on competition in the notified arrangements. It stated, that rather than engaging in hypothetical arguments at that stage - which would amount to a largely artificial exercise which would hardly be of assistance to the Authority - they proposed to reserve the right to advance arguments for a licence on grounds set out in Section 4(2) of the 1991 Act in the future, in the event of the Authority concluding that the notified arrangements did restrict competition contrary to Section 4(1).

Other Information

10. 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. There were no submissions from third parties.

(g) Subsequent Developments

11.1 The Authority, following its initial assessment, issued Statements of Objections in both cases on 13 October 1998, and published Notice of its Intention to refuse a Certificate or Licence to the arrangements notified.

Ethical Guide

11.2 As regards the Institute’s Ethical Guide, the Authority’s Objections centred around certain aspects of some of the Statements contained in the Guide. These are described briefly below.


Statement 6: Changes in a Professional Appointment

  1. Statement 6, Section 1.0, of the Ethical Guide states that, notwithstanding the right of clients to choose their auditors -

“...it is necessary, in the interests of both public and the existing auditor or advisor and prospective auditor or advisor, for a member who is asked to act by a prospective client in respect of an audit or recurring accounting services and taxation work of a compliance nature, to communicate with the existing auditor or advisor, and for the latter to reply promptly as to any considerations which might affect the prospective auditor or advisers decision whether or not to accept appointment.”

The Authority considered that a consumer of any good or service should, in principle, be able to change his supplier without the hindrance of the existing supplier having, in effect, first refusal. The Authority further considered that the requirement in the Statement had the effect of encouraging the incumbent accountant to overstate concerns he might have about a client who was about to move its business to another firm. It concluded that Statement 6 of the Ethical Guide had the object or effect of preventing, restricting or distorting competition in the provision of auditing and other accounting services, and that it contravened Section 4(1) accordingly.

Statement 7: Consultancy

  1. Section 1.0 of this Statement provides that -

“if a member in practice (the practitioner) obtains the advice of a member (the consultant) on a consultancy basis on behalf of a client, the consultant, or any practising firm with which he or his consultancy organisation is associated, should not, without the consent of the practitioner, accept from that client within three years of completion of the consultancy assignment, any work which was, at the time the consultant was retained in relation to the client’s affairs, being carried out by the practitioner.”

It is further stated in Section 2.0 that “the same considerations apply where a practitioner introduces one of his clients to the consultant for the purposes of consultancy.” The Authority considered this a direct and unwarranted restriction on the commercial freedom of the consultant firm to compete for and obtain client business. While the Authority had, in many instances, given its approval to post-termination non-compete clauses, such approval was limited to restrictions lasting less than 12 months (and there must normally be some intellectual property transfer involved, such as in franchising). In the opinion of the Authority, Statement 7 contravened Section 4(1), as it had the object and effect of restricting or distorting trade in services in the State.

Statement 10: Fees

11.5 Section 1.0 of Statement 10 provides that -

“The Institute has been advised that a member is entitled in law to charge for his/her services:
(i) such specific fee as he or she has agreed with the client: or
(ii) a fee calculated in accordance with any agreement with the client; or
(iii) in the absence of an agreement, a fee calculated by reference to the custom of the profession.”.

In the opinion of the Authority, the reference to “a fee calculated by reference to the custom of the profession” had the effect of “directly or indirectly fixing purchasing or selling prices” and contravened Section 4(1). Although subsections (i) and (ii) of Statement 10 allowed firms to agree their own prices with clients, the Authority considered that, in the absence of an agreement, stated reliance on industry-wide norms could lead to floor prices being set for the provision of accounting services.


11.6 In relation to fees for audit work , Section 2.4 of Statement 10 states that -

“Firms obtaining work having quoted levels of fees which they have reason to believe are significantly lower than those charged by an existing auditor or quoted by other tendering firms, should be aware that their objectivity may appear to be threatened.”

The Authority considered that this provision could have the object or effect of restricting or distorting competition in trade in services in the State. Auditors had a legal obligation under the Companies Acts to be objective in the performance of their statutory function and, if they did not do so, could leave themselves open to civil or criminal proceedings. Furthermore, a resigning auditor was legally obliged to issue a notice indicating the circumstances surrounding his resignation. There was also a statutory obligation on auditors to carry out their audits with professional integrity. Thus, auditors had to behave objectively, irrespective of the fees they were charging. The Authority considered that Section 2.4 of Statement 7 had the object or effect of dampening price competition between firms, as it associated aggressive price competition with the suspicion of unprofessional conduct and that it contravened Section 4(1).

Statement 11: Obtaining Professional Work

11.7 Statement 11, Section 1.4, of the Ethical Guide states that “Members should not make comparisons in such (promotional) material between their fees and the fees of other accounting practices, whether members or not.” The Authority considered this to be in contravention of Section 4(1), as it was an essential element of competition that consumers were able to compare prices (on a commensurate basis) across firms. In the opinion of the Authority, the extension of this to non-members in Section 1.4 could, in addition, facilitate collusion between the various accounting bodies in the areas where their members were in direct competition with each other. The Authority considered that this contravened Section 4(1).

11.8 Section 4.0 of Statement 11 deals with “ cold calling ”, stating that “in relation to audit or other financial reporting work, a member should not make an unsolicited personal visit or telephone call to a person who is not a client with a view to obtaining professional work from the non-client.” The Authority had previously held that, while some consumers may find cold-calling a nuisance, it can enhance the level of competition in a market. In this instance, accountants would not, typically, be soliciting business from ordinary consumers, but from businesses, whom the Authority felt were generally capable of making rational judgements about their choice of accountants, without feeling threatened or unduly pressurised. To suggest that members should not use cold-calling as a method for obtaining business was, in the Authority’s opinion, a restriction on accountants’ ability to compete for business and, as such, contravened Section 4(1).

Rules of Professional Conduct

12.1 As regards the Institute’s Rules of Professional Conduct, the Authority’s Objections centred around certain aspects of Rules 401 and 402 (These Rules are part of overall Rule 400 - “Professional Engagements”). Several of these provisions mirror statements in the Institute’s Ethical Guide for members (see paragraph 11 above), and the Authority’s concerns were accordingly the same, and need not be repeated here. These are described briefly below.

12.2 Rule 401.2 states -

“Members shall not accept appointment with respect to any function relating to the practice of public accounting, where they are replacing another public accountant, without first communicating with such public accountant and enquiring whether there are any circumstances they should take into account which might influence their decision whether or not to accept appointment.”

The Authority had the same concerns with this Rule as with Statement 6, Section 1.0 of the Ethical Guide, and considered that it contravened Section 4(1) accordingly.

12.3 Further rules also raised competition concerns. These were -

“402.1 Members invited to undertake professional work additional to that already being carried out by another public accountant, who will still continue with his existing duties, shall notify the other public accountant of the work they are undertaking. The notification need not be given if the client advances a valid reason against it. Members who are so notified shall co-operate fully with the members undertaking the additional work.

402.2 Members who accept special assignments, whether by referral or otherwise, from a client of a public accountant who is continuing in his relationship with that client shall not take any action which would tend to impair the position of the other public accountant in his ongoing work for his client.

402.3 Members who accept an assignment for specific services by referral from another public accountant shall not provide nor offer to provide any different services to the referring accountant’s client without the consent of the referring accountant. The interest of the client being the overriding concern, members who have made such a referral shall not unreasonably withhold such consent.”

12.4 The Authority considered that the obligation on a competitor to notify an incumbent of work additional to that which the incumbent was currently carrying out (Rule 402.1) could lead to a lessening of competition between firms, since it would tend to make it harder for accountants to gain a reputation with the clients of others. The Authority was concerned at any obligation or practice which made it difficult for clients to shop around for other providers of services they required, or which might discourage them from doing so. In the Authority’s opinion, therefore, the obligation on prospective competitors in Rule 402.1 was anti-competitive and contravened Section 4(1).

12.5 The Authority considered that Rule 402.2 had the object and effect of restricting competition between accountants, since there were a wide range of actions which could be taken by an accountant to whom additional work was referred which could “tend to impair the position” of the incumbent. For example, if the second accountant were to set very competitive fees, this could be regarded as impairing the position of the incumbent, if the latter’s fees were not as competitive. Equally, if the second accountant were simply to be more effective and efficient than the incumbent, all the actions which served to make him so could, under this Rule, be equally regarded as impairing the incumbent’s position. Given the importance, for a client, of gaining experience with a particular firm in choosing to move more business to that firm, Rule 402.2 made it difficult for the entrant firm to compete aggressively, as to do so might lead to charges by the incumbent that the client account was lost due to a breach of the Rule.

12.6 The Authority considered that Rule 402.3 made it even more difficult for the referred accountant to compete with an incumbent for extra business with the client concerned since, effectively, he had to seek the incumbent’s permission to compete. The Authority considered that this rule clearly dampened the incentive of the referred firm to compete aggressively for business, and that it acted as a brake on the turnover of accountancy appointments. The Authority therefore considered that Rule 402.3 contravened Section 4(1).





Oral Hearing

13.1 The Institute made a written response to the Authority’s Statement of Objections, and its representatives elaborated on this at an Oral Hearing held by the Authority on 18 December 1998.

13.2 The Institute explained that it had been established by Royal Charter in 1888 to ensure that the highest professional standards were maintained when providing accounting and financial knowledge and services. The Institute dealt with complaints and made sure that the rules and guides were adhered to, even where this was contrary to the member’s self-interest. In summary, the main points covered at the Oral Hearing were as follows.

Definition of the Market

13.3 The Institute claimed that the market could be split into two markets - audit work and non-audit work. Large amounts of non-audit work could be undertaken by people who were not accountants. It also stated that the Ethical Guide and Professional Conduct rules would be enforced slightly differently in audit and non-audit situations, and that the Ethical Guide and the mandatory guidance in the handbook laid down much stricter criteria for audit than for non-audit work.

Ethical Guide

Professional enquiry process (Statement 6)

13.4.1 In relation to changes in professional appointment, it was extremely important that the accountant communicate with the existing auditor so that he knew his client, especially in these times of increased crime and money laundering. The Institute felt very strongly on this issue. The Institute stressed the importance, in relation to work of a compliance nature, of the new auditor contacting the outgoing auditor to find out if there is any reason that would affect his decision to accept the audit assignment, i.e. lack of records, contacts etc., the aim being to ensure that the incoming person was able to carry out the audit to the highest standard. However, the Institute acknowledged the concern expressed by the Authority and agreed to consider amending the wording of this rule.

Consultancy and special assignments (Statement 7)

13.4.2 This rule was important to encourage accountants, especially sole practitioners, to get specialist assistance without fear of losing their clients. However, it was accepted that three years was a long non-compete period and an amendment to one year was suggested.

Fees (Statement 10)

13.4.3 The Institute felt that the Authority had misunderstood this statement. It was not intended to prevent members from quoting low fees. However, where low fees were charged, the member might be requested to prove that the standard of work was sufficiently high. Nonetheless, the Institute could fully understand the Authority’s concerns on the actual wording of this statement, and suggested the following replacement for paragraphs 1.0 and 1.1 of Statement 10 -

“1.0 The Institute has been advised that a member is entitled in law to charge for his or her
services:

(i) such a fee as he or she has agreed with the client; or
(ii) a fee calculated in accordance with any agreement with the client; or
(iii) in the absence of an agreement a fee which is fair and reasonable
calculated by reference to -

• the seniority and professional expertise of the persons necessarily
engaged on the work;
• the time expended by each;
• the degree of risk and responsibility which the work entails;
• the priority and importance of the work to the client

together with any expenses properly incurred.”.

13.4.4 As regards its previously-expressed fear that low fees for audit work might lead to perceptions of lack of objectivity, the Institute maintained that there was no prohibition at all on setting a level of fees between the accountant and the client at any particular level - an accountant could set a low fee if he wished. Nonetheless, the Institute submitted that the perception existed that if a low fee were quoted, the quality of work would be poor. If an accountant was charging an extraordinarily low fee, the question arose as to whether the accountant was doing all the work required. While the Institute insisted that price competition was “alive and well in the Industry”, it nevertheless agreed to consider re-wording Section 2.4 of Statement 10 in a way which concentrated more on fees which could not be deemed appropriate to the work being performed.

Obtaining Professional Work (Statement 11)

13.4.5 As regards its ban on comparative advertising, the Institute submitted that it had moved substantially from a position where advertising had been prohibited, to the present situation to allow advertising; however, it felt that advertising which quoted a fee could never be included. There was no fixed product, therefore a price could not be set, as it would depend on the condition of the records available, the expertise required etc. It was not possible to say that an audit for a pub, for example, would cost a certain amount. There was no accredited independent benchmark which was definitive on a certain product. The Institute nonetheless agreed to consider its position on the matter.

13.4.6 As regards its ban on cold-calling, the Institute submitted that it had had a number of complaints from third parties about this practice, but nonetheless again agreed to re-consider its position, if required to do so by the Authority.

Professional Conduct Rules

13.5.1 As regards the Rules of Professional Conduct, the Institute submitted that those Rules (in Section 400 - “Professional Engagements”), to which the Authority had objected, were essentially a repeat of corresponding provisions in the Institute’s Ethical Guide. It was suggested that the outcome of the Authority’s deliberations on the Ethical Guide would also determine the outcome as regards the Rules of Professional Conduct.

Further Exchanges

14.1 Following the Oral Hearing, the Institute forwarded further responses and proposals to the Authority on 1 February 1999.

Ethical Guide

14.2 As regards Statement 6 (Changes in a Professional Appointment), the Institute submitted a substantially revised version of the whole Statement, with a view to recognising the Authority’s concerns regarding the timing of contacts between “incoming” and “outgoing” advisers, and any concern that the existing wording implied that a system of “first refusal” was allowed.

14.3 As regards Statement 7 (Consultancy), the Institute proposed that its current three-year non-compete provision be reduced to 12 months.

14.4 On Sections 1.0 and 1.1 of Statement 10 (“calculation of fees by reference to the custom of the profession”), the Institute proposed to merge these two Sections as follows -

“1.0 The Institute has been advised that a member is entitled in law to charge for his or her services:
• the seniority and professional expertise of the persons necessarily engaged on the work;
• the degree of risk and responsibility which the work entails;
• the priority and importance of the work to the client;
together with any expenses properly incurred.”.

14.5 As regards Section 2.4 of Statement 10 (possibility of perceived lack of objectivity through low fees), the Institute suggested a minor amendment, as follows (amendments highlighted) -

“Assurance engagements are special in nature, because of the public and professional interest in the objectivity of practitioners’ work . Firms obtaining work having quoted levels of fees which they have reason to believe are significantly lower than those charged by an existing auditor or quoted by other tendering firms, for example , should be aware that their objectivity, and the quality of the work they do , may appear to be threatened. Such firms should ensure that their work complies with Auditing Standards and Guidelines and Audit Regulations and, in particular, quality control procedures.....”).

14.6 As regards the ban on comparative advertising (Statement 11, Section 1.4), the Institute continued to strongly disagree with the Authority’s objections, believing that, as no standard product or price structure existed, to remove this prohibition would conflict with an EU Directive dealing with Comparative Advertising [5]. Article 1 of that Directive provided that the advertising concerned should objectively compare one or more material, verifiable and representative features of goods and services (“which may include price”), and compare goods or services meeting the same needs or intended for the same purpose. The Institute also pointed out that the Directive did not “ prevent Member States from maintaining or introducing bans or limitations on the use of comparisons in the advertising of professional services, whether imposed directly or indirectly or by a body or organisation responsible, under the law of the Member State, for regulating the exercise of a professional activity ”.

14.7 Finally, the Institute agreed to remove its prohibition (in Section 4.0 of Statement 11) on cold-calling.

Rules of Professional Conduct

14.8 As already noted, the Institute accepted that the offending requirements in Rule 400 were already included in the Ethical Guide. The Institute thus indicated, in its letter of 1 February, 1999, that, so long as acceptable corresponding provisions were included in the Ethical Guide, it would be prepared to remove Rule 400 from the Rules of Professional Conduct).

Further Response by Institute

14.9 In a letter dated 24 July, 2000, the Institute stated that the revisions to its Ethical Guide which it had proposed to the Authority, as outlined above, had now been made and were being circulated to its membership, with an effective date of 1 September, 2000. Members were also being notified that, also from 1 September, 2000, Rule 400 of the Institute’s Rules of Professional Conduct had been withdrawn.

ASSESSMENT


15.1 Section 4(1) of the Competition Act, 1991, 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 (some 40% are in private 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 arrangements have effect within the State.

15.2 As indicated at paragraph 14 above, the Institute, in a letter of 1 February, 1999, made a number of proposals for amendments to its Ethical Guide, following the Authority’s Statement of Objections and the Oral Hearing. By further letter of 24 July, 2000, the Institute stated that these proposals had been promulgated to members, to come into effect on 1 September, 2000. The Authority has fully considered these proposals.

Ethical Guide

15.3 The Authority considers that the amendments now made by the Institute to Statements 6, 7 and 10, as well as the removal of the ban on cold-calling in Statement 11, meet its concerns.

15.4 As regards Section 1.4 of Statement 11 (ban on comparative advertising), the Authority notes the issues raised by the Institute concerning the EU Directive in this area. In particular, the Authority notes that the Directive concerned allows Member States 9 to maintain a ban on comparative price advertising in the advertising of professional services (but not, notably, a ban on price advertising as such); further, that the Directive allows self-regulatory bodies recognised by law (which would include the Institute) to maintain such a ban. In addition, the Authority notes that the general law on misleading advertising applies to professional services as much as to any other sector. The Authority has also considered the Institute’s claim that objective comparisons on a price basis between two providers in the accountancy services sector would be extremely difficult. The Authority accepts that such comparisons would be very difficult to make or sustain, and that this is a contributory factor to the exception made in the EU Directive concerned. In the circumstances, the Authority accepts that the Institute has satisfactorily addressed its concerns on Section 1.4 of Statement 11.

Rules of Professional Conduct


15.5 The Authority notes that the Institute has now removed Rule 400 (which includes those provisions to which the Authority had objected) from its Rules of Professional Conduct.




The relevant market


15.6 The preliminary view of the Authority was that the relevant market in this case was the market for accounting services, including audits, in the State. The Institute disagreed, claiming that there were two markets involved, i.e. audit work and non-audit work. Following further consideration, and taking into account the changes which have now been made by the Institute to its Ethical Guide and Rules of Professional Conduct to meet the Authority’s detailed concerns, the Authority can now leave open the question of the definition of the market in this case.

DECISION

16 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 Institute’s Ethical Guide for Members and Rules of Professional Conduct do not contravene Section 4(1) of the Act.

CERTIFICATE


17. 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 following arrangements notified under Section 7 of the Competition Act, 1991, as amended, on 30 September 1992, do not contravene Section 4(1) of that Act.

Notification No.CA/827/92E - Institute of Chartered Accountants in Ireland/ Rules of Professional Conduct

Notification No.CA/828/92E - Institute of Chartered Accountants in Ireland/ Ethical Guide for Members




For the Competition Authority

Declan Purcell
Member

18 September 2000.


[1] This was the subject of Decision No. 520 of 12 October 1998.
[2] The Authority understands that the Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants of Scotland are also recognised for this purpose.
[3] The Economist of 25/10/1997 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).
[4]Now Article 81.
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).
[5] Directive 97/55/EC amending Directive 84/450/EEC concerning misleading advertising so as to include comparative advertising.

© 2000 Irish Competition Authority

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