The big four accountancy firms should be broken up to improve the auditing of public companies in the wake of high-profile collapses like Carillion and BHS, MPs have argued.
The House of Commons Business Committee told the competition watchdog to aim for a “full structural break-up” of PwC, Deloitte, KPMG and EY after the firms have been accused of missing signs of distress at several large companies.
In a hard-hitting report the Business Committee said conflicts of interest should be tackled by splitting the big four up into audit firms that check companies’ books and consultancy firms that provide advice on other areas.
The Competition and Markets Authority (CMA) is expected to release its final recommendations on reforming the audit market shortly. It’s initial assessment recommended a functional split between accountants’ auditing and consultancy arms but the MPs recommendations go further.
Committee chairwoman Rachel Reeves said: "For the big firms, audits seem too often to be the route to milking the cash-cow of consultancy business.
"The client relationship, and the conflicts of interest which abound, undermine the professional scepticism needed to deliver reliable, high-quality audits. Splitting audit from non-audit business would be a big step to boosting the culture of challenge needed to deliver high-quality audits.
"We must not wait for the next corporate collapse. Government and regulators need to get on and legislate to deliver these reforms and ensure that audits deliver what businesses, investors, pension-holders and the public expect."
Auditors have come in for criticism after a number of large companies have gone bust without the accountants who checked their books highlighting problems.
The business committee also raised questions about the dominance of the big four which check the books of 97 per cent of Britain’s largest listed firms.
The Business Committee recommends using joint audits for the most complicated cases. This would mean multiple accountants sharing work on a single company’s accounts.
In addition, it wants to reduce the number of consecutive years a company can stay with the same auditor from 20 years to seven. After this there would be a cooling-off period of three years during which the auditor cannot offer consultancy services to the client.
Some auditors have been accused of developing “cosy” relationships with certain clients that hampered their ability to properly scrutinise the management’s accounts.
The committee also took aim at Britain’s fifth-largest accountancy firm Grant Thornton which audited cake chain Patisserie Valerie.
Chief executive David Dunckley informed the Business Committee that it was not part of Grant Thornton’s role to look for fraud during its audit of the company.
A £40m hole in Patisserie Valerie’s accounts was subsequently uncovered by forensic accountancy work carried out by a different firm.
Ms Reeves said that “change in the audit market is long overdue”.
"The 'Big Four's' dominance has fostered a precarious market which shuts out challengers and delivers audits which investors and the public cannot rely on.
"Our report proposes a range of measures to boost competition, improve the audit product, and ensure that the UK continues to be a world leader in corporate governance."
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