Big Four: British regulators baulk at enforced break-up of dominant accounting giants
THE BIG PICTURE
The Big Four accounting firms have avoided forced break-ups but may have to split their UK operations into separate business units as part of a sweeping overhaul of the industry proposed by regulators.
Deloitte, EY, KPMG and Britain's Competition and Markets Authority (CMA) said audit work should be split from the much-larger consulting business at an operational level, but held off on recommending a full structural break-up or a cap on auditor's market share. A further report said the UK needed a tough new watchdog to prevent a re-run of the failings of the past.
The reports "represent a meaningful effort to address long-standing weaknesses in the audit market by addressing insidious conflicts of interest," said Natasha Landell-Mills, head of corporate governance at asset manager Sarasin & Partners. "There is now an urgent need to make clear what exactly the audit is for."
Stung by a string of scandals at prominent British firms including Carillion, the UK government demanded regulators set out reforms to roll back the dominance of the largest accounting firms, known as the Big Four. The industry has had a turbulent year, with record fines and reprimands issued.
"These intractable problems may take some years to sort out," CMA chairman Andrew Tyrie said. "If it turns out proposals are not far-reaching enough, the CMA will persist until the problems are addressed."
Separately, the UK government said it agreed with a new report that the Financial Reporting Council (FRC) should be abolished and replaced with a new accounting regulator. The new watchdog, the Audit, Reporting and Governance Authority, will have powers to investigate companies, their accounts and governance.
The FRC was accused of being too close to the firms it oversaw, especially Deloitte, KPMG, EY and PricewaterhouseCoopers. "I have sympathy with the view that the FRC has tended overall to take too consensual an approach to its work," said John Kingman, the chairman of Legal & General, who led a review of the regulator.
KPMG said the reports contained "constructive suggestions" while David Sproul, Deloitte's UK CEO, acknowledged that many had lost faith in auditors. "It's clear that trust and confidence in the role of the profession is not where it should be and we are supportive of change that enhances audit quality," he said.
PwC and EY also issued statements pledging support for measures that boost public trust in the audit sector. The operational split envisaged by the CMA would allow for separate profit pools within the firms, ensuring that auditors are only paid for the audit work they do. The Big Four avoided a full break-up of accounting and consulting into separate companies as the CMA said such proposals would be "protracted and complex" because of the reach of the firms' large international networks.