The UK’s Big Four accountancy firms are facing a major shake-up under reforms proposed by the competition watchdog. The Competition and Markets Authority (CMA) wants to separate audit from consulting services, while also encouraging a wider choice of auditors.
The review follows high-profile company collapses such as construction firm Carillion, which was audited by KPMG. The CMA said if its proposals “are not far-reaching enough”, it “will persist until the problems are addressed”.
The regulator said that at present, the “Big Four” accountancy firms – Deloitte, EY, KPMG and PwC – conduct 97% of big companies’ audits, while also providing them with other services.
“Companies choose their own auditors,” said the CMA.
“As a result, we have seen too much evidence of them picking those with whom they have the best ‘cultural fit’ or ‘chemistry’, rather than those who offer the toughest scrutiny.”
The CMA said “robust reform” was needed. Businesses should be audited by the most challenging firm – not the cheapest.
Its three main recommendations are:
- A split between audit and advisory businesses, with separate management and accounts
- More accountability for those appointing auditors, with the aim of strengthening their independence
- A “joint audit” system, with a Big Four and a non-Big Four firm working together on an audit.
The Financial Reporting Council, which regulates the accountancy sector, has also been under review and plans have been put forward to toughen up the regulation of major audit firms.
The report, headed by Sir John Kingman, recommends that the FRC is replaced by a new Audit, Reporting and Governance Authority.
He said: “All in all, some of the FRC’s critics overstate their case. Nevertheless, I have sympathy with the view that the FRC has tended, overall, to take too consensual an approach to its work.
“The FRC’s approach to its own governance has also not been consistent with either its public importance, or its role in championing governance in the corporate world. We need to take the opportunity to make a fresh start.”
CMA chairman Andrew Tyrie said: “Addressing the deep-seated problems in the audit market is now long overdue.
“Most people will never read an auditor’s opinion on a company’s accounts. But tens of millions of people depend on robust and high-quality audits.”
The CMA said its proposals would be open to public consultation until 21 January.
“These intractable problems may take some years to sort out,” said Mr Tyrie. “If it turns out that the proposals are not far-reaching enough, the CMA will persist until the problems are addressed.”