A break-up of Britain’s big four accountancy firms could end their dominance in auditing the accounts of large companies and address a crisis of confidence facing the sector after a series of scandals, a UK regulator has suggested.
Stephen Haddrill, the chief executive of the Financial Reporting Council, which regulates the sector, called for an investigation into whether KPMG, Deloitte, PwC and EY should have to spin off their UK audit arms into separate businesses.
The aim would be to increase competition and eliminate conflicts of interest arising from the dominance of the four firms.
It follows a series of corporate accounting scandals, including UK construction firm Carillion, whose books were signed off by KPMG and which collapsed under a pile of debt in January. Deloitte is under review by regulators in South Africa after the firm flagged irregularities in the accounts of its client, the furniture group Steinhoff, which owns Poundland, Benson for Beds and Harveys in the UK.
“There is a loss of confidence in audit and I think that the industry needs to address that urgently,” Haddrill told the Financial Times. “In some circles, there is a crisis of confidence.”
Haddrill has held discussions with the Competition and Markets Authority about opening an investigation into the UK audit market, and is planning to hold future meetings on the issue.
The big four accountants audited all but nine of the companies listed on the FTSE 350 at the end of their financial years, according to Manifest, a research firm that provides investors with information on corporate governance.
A previous inquiry into the dominance of the big four by the UK Competition Commission – now replaced by the CMA – resulted in tougher rules for the accountancy sector being introduced in 2013. Measures included a requirement that FTSE 350 companies put their audit business out to tender at least every 10 years.
However, the market share of the four firms subsequently increased, rather than fell.
Haddrill said: “The Competition Commission introduced some remedies to try and encourage more competition. But there is no more competition. So it seems to me that we ought to have another look at [the audit market].”
The CMA told the FT: “We are actively monitoring the remedies put in place following the Competition Commission’s inquiry … This monitoring is ongoing and the [authority] remains open to looking further at this sector in the future.”
Critics of the big four’s dominance have pointed to potential conflicts of interest arising from the rapid growth of their consulting divisions. They argue that an accountancy firm might have a biased approach to a client’s audit if it also has a lucrative consultancy contract with the company, advising it in areas such as tax.
“If you’re in the senior leadership of the firm, I think you need to be focusing heavily on your public interest responsibility, which is the audit bit,” Haddrill said. “[But] so much of your attention is bound to be drawn to the most profitable and the fastest-growing part of your business, which is not the public interest part.”
Audits on Carillion were criticised last month as “a colossal waste of time” by Rachel Reeves, the Labour MP and chair of the business, energy and industrial strategy select committee.
Following a BEIS committee evidence session, Reeves suggested the auditors had a role to play in the collapse of the company.
She said: “We heard from auditors who don’t attend audit meetings, fail to visit projects which they themselves say are at risk, and who provide clarity only about what is not included in an audit rather than what is.”