Competition regulator says huge outfits should also have to work with smaller rivals

This article is more than 1 year old

This article is more than 1 year old

The “big four” accountancy firms could be partially split up and forced to work with smaller rivals, under proposals made by the competition watchdog following a number of corporate collapses including the demise of Carillion and BHS.

The Competition and Markets Authority (CMA) resisted calls for the breakup of the big four – PricewaterhouseCoopers, EY, Deloitte and KPMG – but said this option could be revisited within five years if the profession does not improve.

Instead, the CMA’s final report following its review of “serious competition problems” in the sector recommended that the government pass new laws forcing accounting giants to put greater distance between their audit divisions and their more lucrative consulting operations, to prevent conflicts of interest.

It also called for firms to be forced to hire smaller “challenger” auditors to analyse their books alongside the big four, in an effort to stoke competition. But it said the largest, most complex companies should be exempt from this requirement.

Accountancy firms criticised elements of the proposals, while business lobby group the Confederation of British Industry said they could “undermine confidence in corporate Britain”.

Marcus Scott, chief operating officer of TheCityUK, which represents professional and financial services firms, criticised the recommendations.

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He said the proposals “may make for good headlines, but they are poorly focused” and added that there was “no evidence that they will lead to genuinely enhanced audits”.

The CMA insisted its blueprint would improve the profession. CMA chair Andrew Tyrie, a former Tory MP, 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.”

Lord Tyrie said the government had received similar recommendations from three separate reports, a reference to the Kingman review of audit regulation and the Brydon review of audit quality and effectiveness.

“In large part, they come to similar conclusions. 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.”

The fact that the largest accountancy firms are tasked with scrutinising companies’ books, while also earning huge fees for advising on matters such as takeovers and tax, has fuelled conflict of interest allegations.

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To counter this, the CMA said the two functions should be “operationally” separated, with different bosses, management teams, accounts and pay policies. They would no longer be able to share profits and staff promotions and bonuses would be based on audit quality.

A five-year review of progress will be performed by the accounting regulator, currently the Financial Reporting Council, although the Kingman review has recommended it be replaced with a tougher successor.

The CMA said the option of a full structural split, forcing accountants to separate into two entirely independent businesses, should remain on the table during the review period.

It also proposed that any company that chooses a big four auditor should be forced to recruit a “challenger” audit firm as well, to help smaller accountancy firms grow and spur competition in the sector.

But the largest and most complex companies, likely to include large banks such as HSBC and Barclays, would be exempt from that requirement.

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EY said the proposals were a missed opportunity and risked “the UK’s attractiveness for business”. It said splitting auditing and consulting operations “would undermine audit quality by reducing our ability to draw on critical skills, capabilities and investment and diminish the resilience of the audit business”.

“At a time when the FRC [Financial Reporting Council] is reviewing corporate reporting and the Brydon review may change the scope of audit, it appears ill-timed for the CMA to restrict the skills needed to deliver high-quality audit now and in the future.”

It also criticised proposals for joint audits, as did KPMG, which warned that its smaller rivals might be unable or unwilling to analyse the books of large companies.

KPMG said: “Shareholders, audit committees and the regulator must have total confidence in the ability of these firms to complete this work before the market can move ahead with this recommendation.”