* Auditors "failed" in their duty ahead of financial crash
* PwC: no dereliction of duty, market competitive
* ACCA, ICAEW: auditing, accounting did not cause crisis
* OFT says competition issues may be best tackled globally
(Adds government, OFT reaction)
By Huw Jones
LONDON, March 30 (Reuters) - Competition authorities should probe the world's "Big Four" auditing firms, which failed to warn supervisors about the risks banks were running before the financial crash, a UK parliamentary report said on Wednesday.
PwC, Deloitte, Ernst & Young and KPMG check the books of most blue-chip companies in the world, with London a main global hub for their operations.
"The Big Four's domination of the large firm audit market in the UK is almost complete: in 2010 they audited 99 of the FTSE 100 largest listed companies, which change auditors every 48 years on average," the UK parliament's upper chamber, the House of Lords, said in a report.
"It is clearly an oligopoly, with all the attendant concerns about competition, choice, quality and conflict of interest. It gave no warning of the banking crisis."
It called on the Office of Fair Trading to open a detailed investigation into the audit market with a view to a possible inquiry by the more powerful Competition Commission.
"We feel it does need a broader, more sustained, thorough look," John MacGregor, chairman of the lawmaker panel that drafted the report, told Reuters.
The report said complacency of bank auditors was a significant contributory factor to the financial crisis that forced Britain to nationalise or buy large chunks in lenders such as Northern Rock, Lloyds and RBS.
"Either they were culpably unaware of the mounting dangers, or ... they equally culpably failed to alert the supervisory authority of their concerns," the report said.
PwC was singled out for "disturbing complacency" in not pointing out risks in the business model of Northern Rock.
PwC said it was disappointed with the call for an OFT inquiry, saying the audit market was "fiercely competitive".
"I do not agree that we were complacent, and I am surprised by the committee's claim that there was a 'dereliction of duty', given their stated view that auditors fulfilled their legal duties," PwC's UK chairman Ian Powell said.
KPMG also disputed the allegations of dereliction of duty and complacency, but welcomed an investigation "as a way of bringing to a head the long-running debate on competition and choice".
EU ACTION INEVITABLE
The ICAEW, an accounting body, rejected the finding that auditors contributed to the severity of the financial crisis, saying they did the job they were expected to do, but agreed that the audit model needed to evolve.
The ACCA, another accounting body, welcomed the report's call for auditors to play a wider role such as commenting on a company's business model but rejected the conclusion that international accounting standards contributed to the crisis.
Regulators see greater competition in the sector as a matter of urgency, fearing instability if one of the Big Four went under, repeating the collapse of Arthur Andersen in 2002, which shrank the pool of big auditors from five to four.
The OFT's board meets on April 7, when it will decide on whether to open a probe into whether banks entrench Big Four dominance by insisting that companies receiving loans must be audited by one of the four firms.
MacGregor thinks this remit would be too narrow.
The OFT said it would study the recommendations and that competition in audit services appeared limited.
"On wider issues in the market, a key question is whether these can be most effectively resolved by the UK competition authorities acting alone or through coordinated action with international organisations, such as the OECD or the European Union," the OFT said.
The Big Four should also draw up "living wills" to enable an orderly transfer of clients should one of them go bust, the report said.
The British government should also introduce legislation forcing auditors to meet every three months with supervisors about the banks they audit, MacGregor said.
This would avoid auditors' concerns about sparking a collapse of confidence or run on a bank if they required a bank to publish qualifiers in their accounts, the report said.
The UK Department of Business and Industry said it was studying the report and would respond in coming weeks.
Previous attempts to cultivate dialogue ran into the sand in the years running up to the financial crisis, and the recent paucity of meetings was a dereliction of duty by both auditors and regulators, the report said.
The Bank of England and Financial Services Authority have proposed a new code of practice to revive regular meetings with auditors, but the report said this did not go far enough.
UK financial services minister Mark Hoban told the lawmakers he would be happy to make such dialogue mandatory if requested by the Bank. The UK Treasury had no immediate comment.
The European Union's executive, the European Commission, is due to come out with legislation in November to inject more competition in the auditing sector. (Editing by Jon Loades-Carter and Will Waterman)