It’s time for the Big Four Accountants to break-up – say MPs

The Business, Energy and Industrial Strategy Committee (BEIS) have called on the competition watchdog to break-up the consultancy and auditing arm of the big four accountancy firms, PWC, KPMG, Deloitte and EY.

MP’s have called for the operational and structural split of the audit and consultancy functions for Britain’s largest accountancy firms. The review published today by the Competition & Markets Authority (CMA) makes a series of proposals to reform the audit industry and level the playing field between the big four and challenger firms.

The four firms were responsible for providing 99 per cent of auditing services to the UK’s 100 biggest listed companies from 2016 to 2017 and 97 per cent of auditing services to FTSE 350 audits. In recent years, two big four firms were responsible for carrying out the audit of two high profile businesses which soon collapsed.

KPMG was responsible for the audit of UK’s second largest former construction company, Carillion.  PWC was responsible for the botched audit of BHS, for which the participating partner was banned from carrying out auditing work for 15 years, handed a six-figure fine and PWC was fined a record £6.5 million. British Home Stores soon fell into administration with 11,000 jobs lost.

Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy Committee said:

"Change in the audit market is long overdue. The reviews from the CMA and Kingman highlight the failings; now we need action. 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. A segmented market-cap and the piloting of joint audits would help to break the stranglehold of the Big 4 and deliver a healthier and more resilient audit market.”

The CMA review proposes joint audits between big four accountancy firms and non-big four firms to open the market to competition, as supported by the BEIS. The committee which is made up of MPs have proposed that if the leading firms loosen their grip on the market and split the internal functions, this would result in more accountability and independence. By tackling conflict of interest, it cushions the market from experiencing the next corporate failure, such as Carillion.

Commenting on the BEIS Committee’s report on the Future of Audit, Hemione Hudson, Head of Assurance at PwC UK, said:

“We recognise the need for reforms which will enhance audit quality; however, the report’s recommendation to break up the largest firms risks hampering, rather than enhancing it.  Arguing for ‘break-up’ sounds like action, but actually it will reduce quality, weaken resilience and distract attention from more practical steps to ensure auditing keeps pace with society’s expectations. There are likely to be significant unintended consequences from breaking up the large professional services firms, with increased cost and disruption to the economy and businesses which would be damaging to the UK’s competitiveness.”

The government statement can be found here, along with the conclusions and recommendations.