An agonised debate has been raging for several years about how to tame the power of the big four audit firms – EY, KPMG, Deloitte and PwC.

The debate has taken on greater urgency following a series of high-profile corporate collapses, including those of Carillion and BHS, which raised questions about the role of their auditors.

The Competition and Markets Authority is now investigating competition in the sector, while separately the function of the industry watchdog, the Financial Reporting Council, is being reviewed by Sir John Kingman, the chairman of Legal & General and a former Treasury mandarin.

MPs on the Business, Energy and Industrial Strategy Select Committee are also looking into the future of auditing.

A number of proposals have been put forward to boost competition in the sector, including forcing companies to change their auditor more frequently, imposing 'joint auditor' appointments on quoted companies or introducing a cap on the number of FTSE 350 companies that any firm may audit.


Today brought another potential solution, however, with news that BDO and Moore Stephens, respectively the sixth and eighth largest players in the audit market, are in advanced merger discussions.

The combined business will have 5,000 staff and annual revenues of £560m, making it the fifth largest player in the market, leapfrogging Grant Thornton.

It is the latest in a string of mergers involving both parties.

BDO joined forces with PKF in 2013 while Moore Stephens merged with Chantrey Vellacott in 2015 and last year acquired the consulting firm James, Brennan & Associates.

Image: The big four auditors dominate the sector

The enlarged business, which will trade under the BDO banner, will be the leading player in advising mid-sized companies, while the tie-up will entrench BDO's position as the biggest auditor of companies listed on the Alternative Investment Market (AIM), the junior market on the London Stock Exchange.

But both sides are also clear that the combined firm will, in their words, "challenge its larger competitors for more complex, audit, tax and advisory work".

That means that the enlarged BDO will undoubtedly be pushing for more mandates from FTSE 100 companies.

It currently has one client in the Footsie, the gold miner Randgold Resources, which is about to lose its London listing following its merger with Canadian giant Barrick Gold.

This is in stark contrast to Grant Thornton, whose former chief executive, Sacha Romanovitch, told Sky News earlier this year why the company had stopped tendering for such business.

Ms Romanovitch, the first woman to lead a top UK auditing firm, stepped down last month after clashes with a number of senior colleagues over changes to the way the business was being run.

The BDO-Moore Stephens merger will pose a particular challenge to Grant Thornton.

It has long prided itself on being the biggest player outside the big four but may now be forced to look for merger partners of its own in an effort to bulk up.

The big question is whether this combination will be sufficiently big as to trouble the big four.

Even after this deal, the enlarged BDO's annual revenues will still be almost a quarter of the size of those at KPMG, currently the smaller of the big four.

And some will argue that removing one player from a market scarcely makes it more competitive.

So, of itself, it is unlikely to dampen the demands in some quarters for the big four to be broken up.

But the merger will undoubtedly be of interest to the regulators and politicians currently poring over the audit market.

And it will be fascinating to see how competitors of BDO and Moore Stephens in the so-called mid-market react.