Watchdog orders major shake-up of big four accountancy firms but does not recommend full split

Audit and consultancy to be ‘operationally’ separate while remaining within same group of companies

Ben Chapman
Thursday 18 April 2019 08:46
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Peter Kyle MP to Carillion auditors 'I wouldn't let you audit the contents of my fridge'

The competition watchdog has called for a major overhaul of Britain’s “big four” accountancy firms, but stopped short of recommending a full-scale breakup.

In the wake of a series of high-profile collapses including Carillion and BHS, auditors have been accused of signing off company accounts after missing signs of financial distress.

But the Competition and Markets Authority (CMA) ignored calls from MPs earlier this month to push for a complete breakup of KPMG, Deloitte, PwC and EY.

Auditing departments should be split from their often much larger consultancy businesses but can remain within the same group, the CMA said.

The separate divisions would have different bosses, management teams, accounts and pay policies while remaining part of the same group.

Lord Andrew Tyrie, CMA chairman, said: “People’s livelihoods, savings and pensions all depend on the auditors’ job being done to a high standard.

“But too many fall short – more than a quarter of big company audits are considered sub-standard by the regulator. This cannot be allowed to continue.”

Under the CMA’s proposals, competition would be encouraged by the introduction of mandatory joint audits, which would force the big four to work with smaller partners when checking accounts.

KPMG, Deloitte, PwC and EY currently sign off the accounts of 97 per cent of FTSE 350 companies and 99 per cent of FTSE 100 companies.

Their dominance has led to allegations of a “cosy” relationship with some of the firms that they audit. Business, Energy and Industrial Strategy Committee chair Rachel Reeves has accused the big four of using mundane audit work as a route to “milk the cash cow of consultancy business”.

The CMA called for a regulator to hold company “audit committees more vigorously to account”, including public reprimands for those that fall short of adequate scrutiny from auditors.

Lord Tyrie added: “Conflicts of interest cannot be allowed to persist; nor can the UK afford to rely on only four firms to audit Britain’s biggest companies any longer.”

Business groups criticised the CMA’s proposals, with the Confederation of British Industry warning that they risk damaging Britain’s reputation as a leader in the accountancy business.

“Mandating joint audits will add cost and complexity for business with no guarantee of better outcomes,” said John Allan, the CBI president.

“Operational splits could restrict access to the skills required to carry out complex audits.”

Dr Ian Peters, chief executive of the chartered institute of internal auditors, added: “We welcome the proposal to separate external audit from non-audit services to raise standards, eliminate potential conflicts of interest and ensure the independence of external auditors to reduce the risk of another Carillion-style collapse.”

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