Britain’s ‘Big Four’ accounting firms face major shake-up

The UK’s ‘Big Four’ accountancy firms could be divided up under radical proposals aimed at boosting competition, tackling conflicts of interest and tightening oversight.

EY, Deloitte, KPMG and PwC, currently check the accounts of 341 of the top 350 listed companies in Britain. At the same time they offer consultancy services to these firms, prompting questions of impartiality.

In a bid to reduce their hold on the market for auditing companies, The Competitions and Markets Authority (CMA) has called for FTSE 350 firms to have their books looked at by more than one auditor, one of which would have to be from outside the Big Four.

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The CMA says this would allow smaller rivals to gain experience and credibility and ensure a “cross-check on quality” at the same time.

While the regulator stopped short of calling for a break-up of the Big Four it did propose putting their audit and advisory services into separate operating entities with distinct management, accounts and remuneration.

“Companies choose their own auditors,” said the CMA. “As a result, we have seen too much evidence of them picking those with whom they have the best ‘cultural fit’ or ‘chemistry’, rather than those who offer the toughest scrutiny.”

A second government-commissioned review by Legal & General’s chairman Sir John Kingman, called for an end to self-regulation and for the Financial Reporting Council to be folded in to a new watchdog with a wider remit that would answer to Parliament.

The new watchdog - the Audit, Reporting and Governance Authority - would directly regulate auditors, be forward looking and draw a line under a creaky, leaky, ramshackle and “excessively consensual” FRC perceived to be too close to the Big Four, Kingman said.

The Government is also expected to kick off a third review today headed by London Stock Exchange chairman Donald Brydon.

Sky News reported that the new probe, dubbed “Project Flora”, would look at the future of auditing and the quality of audit work in the UK.

Taken as a whole, the plans “mark the most ambitious attempt yet to reform the accounting industry”, says Reuters.

The Daily Telegraph says it follows “extensive criticism of the sector for its failure to anticipate and flag up a number of scandals including the collapses of Government contractor Carillion and department store chain BHS, and a black hole discovered in Patisserie Valerie’s books”.

Economica reports that “a scathing report from the Department for Business, Energy & Industrial Strategy and Work and Pensions committees accused the Big Four of being 'complicit' in Carillion’s collapse”.

They argued that firms were putting their own profits ahead of good governance at the companies they were auditing.

“PwC, EY, KPMG and Deloitte comprise what many people have described as an oligopoly,” says BBC business editor Simon Jack; now “after waiting years for a review of a sector many think riven by conflicts of interest, three come along at once”.