Competition chiefs have vowed to break up the cosy relationship between Britain's largest companies and the "big four" accounting firms.
The Competition Commission said the market for the external auditing of company accounts was restricted, with two-thirds of FTSE 100 companies using the same audit firm for more than 10 years.
It is looking at ways to encourage greater competition, including through mandatory tendering and rotation of audit contracts.
In presenting its provisional findings, the watchdog said it wants a situation where switching becomes the norm and auditors are less like corporate advisers and more like examining inspectors.
The market is dominated by KPMG, Deloitte, Ernst & Young and PwC, with smaller firms unable to break their stranglehold because companies find it difficult to compare alternatives with their existing auditor.
Laura Carstensen, who chaired the inquiry group, said senior management at large companies were inclined to stick with what they know.
She added: "Shareholders play very little role in appointing auditors compared to executive management - and despite the presence of audit committees and other safeguards, audit firms naturally focus more on meeting management interests. The result is a rather static market in which too often audits don't fulfil their intended purpose and thus fail to meet the needs of shareholders."
Two years ago, the industry was heavily criticised in a report by a House of Lords committee over conflicts of interest and the quality of published accounts in the run-up to the credit crunch.
The commission said it feared that the lack of competition was likely to lead to higher prices, lower quality and less innovation for companies.
But Richard Sexton, PwC's head of reputation and public policy, said the commission "grossly underestimated" the critical role that company audit committees play in protecting the interests of shareholders. He added: "We are very clear that we report to the shareholders and engage with the audit committee as their representatives."
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