Big Four accounting giants face intense scrutiny as competition watchdog launches audit probe

Deloitte, EY, KPMG and PwC have been named in a string of scandals and faced accusations of conflicts of interest

Ben Chapman@b_c_chapman
Tuesday 09 October 2018 16:47
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Deloitte, EY, KPMG and PwC audit almost all of the FTSE 100 of the largest listed UK companies
Deloitte, EY, KPMG and PwC audit almost all of the FTSE 100 of the largest listed UK companies

The Big Four accountancy giants face intense scrutiny after the competition watchdog announced a probe into Britain’s audit market.

Deloitte, EY, KPMG and PwC have been named in a string of scandals and faced accusations of conflicts of interest over their role checking firms' books.

The Competition and Markets Authority (CMA) said on Tuesday that it has launched a detailed investigation into the audit sector to “examine “concerns that it is not working well for the economy or investors”.

The CMA pointed to the collapse of construction giant Carillion in January just months after its accounts had been signed off by KPMG.

In February, Commons Business Committee chair Rachel Reeves, described Carillion’s annual reports as “worthless” while Labour MP Peter Kyle told two KPMG partners that he wouldn’t trust the accountancy firm “to do an audit of the contents of my fridge”.

PwC was later accused by MPs of a “massive conflict of interest” over its multiple roles advising Carillion, as well as the company’s pension fund and the Government. The firm is expected to collect around £50m in fees for managing Carillion’s liquidation.

The Big Four’s stranglehold over the audit market has sparked repeated calls for the giants to be broken up over fears that large companies have little choice but to appoint one of them. Critics say this has led to "cosy" relationships between companies and the accountants hired to check their books.

Deloitte, EY, KPMG and PwC audit almost all of the FTSE 100 and the vast majority of the FTSE 250.

The fifth largest accountancy firm, Grant Thornton, announced in April that it would stop pitching for FTSE 350 audits because it repeatedly lost out on work to the Big Four.

CMA chairman Andrew Tyrie said: “If the many critics of the audit process are right, it is not just the companies which buy audits that lose out; it is the millions of people dependent on savings, pension funds and other investments in those companies whose audits may be defective.

“Sir John Kingman's independent review of the regulator is a big step in the right direction. And the CMA will now examine the market carefully to establish what contribution more effective competition could make to improving audit quality.”

The CMA will focus on three main areas including choice and switching in the audit market. The regulator will also examine the risk that each of the Big Four is “too big to fail”, potentially threatening long-term competition.

Another question the CMA will seek to answer is whether the fact that companies pick their own auditor results in a lack of incentive to produce challenging performance reviews.

Some critics have suggested that shareholders - as the outsiders who rely on an audit to assess the health of a company - should have a role in choosing the auditor.

CMA chief executive Andrea Coscelli said: “High-quality audit work underpins a successful economy and benefits us all. Given the in-depth thinking already done by the CMA and the Competition Commission before it, we plan to move swiftly and to issue our provisional findings before Christmas.”

The Financial Reporting Council, the accountancy watchdog, which has been calling for an inquiry, welcomed the CMA's announcement.

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