Portfolio

'Shake up' but don't break up Big Four auditors, says CMA

By Oliver Haill

Date: Thursday 18 Apr 2019

(Sharecast News) - The 'big four' auditing firms should be shaken up but not necessarily broken up to improve competition, with new regulatory powers introduced to improve accountability, UK competition authorities have recommended.
Following cases including the collapses of Carillion and BHS that suggested "widespread" shortcomings in the UK audit sector as well as "serious competition problems", the Competition & Markets Authority on Thursday recommended separating the audit functions of PricewaterhouseCoopers, EY, Deloitte and KPMG from their consulting arms, the introduction of a mandatory joint-audit process with 'challenger' firms outside the Big Four, and the introduction of new, statutory regulatory powers.

The split of the four firms' operations was necessary, the CMA said, as auditors "should focus exclusively on producing the most challenging and objective audits, rather than being influenced by their much larger consultancy businesses".

Acknowledging that enforcing an immediate split of globe-spanning groups would be "difficult", the CMA recommended just an operational split of UK audit work for now, requiring separate management, accounts and remuneration and a separate CEO and board for the audit arm and an end to profit-sharing between audit and consultancy, holding back the potential for a full break-up if there is not felt to be an improvement in five years' time.

The joint-audit process is designed to increase the capacity of challenger audit firms, increasing choice in the market, which the CMS hopes will drive up audit quality. The biggest and most complex companies, thought to include major banks, would be exempt from this requirement.

As for stepping up audit regulation, the CMA recommended that the regulator "should hold audit committees more vigorously to account", possibly including ensuring that committees report their decisions as they hire and supervise auditors, and that the regulator issues public reprimands to companies whose committees fall short of adequate scrutiny of their auditors.

CMA chairman Andrew Tyrie said: "People's livelihoods, savings and pensions all depend on the auditors' job being done to a high standard. But too many fall short - more than a quarter of big company audits are considered sub-standard by the regulator. This cannot be allowed to continue.

The former MP said conflicts of interest should not be allowed to persist, "nor can the UK afford to rely on only four firms to audit Britain's biggest companies any longer" and said early action "will require legislation"

A spokesperson for the Financial Reporting Council said: "We welcome the CMA's proposals to enable the UK audit market to work better in the interests of investors and other users of financial information. We also support the CMA's objective that reform should drive audit quality and that the regulator should have the means to ensure this happens. In particular we welcome the recognition of the key role of audit committees and the proposed role for regulation in ensuring they deliver on this."

There was some resistance, however, from the business community.

John Allan, president of the CBI, said: "The UK's position as a world leader on corporate governance is highly-prized. But with the eyes of the world on the UK, some CMA proposals risk damaging that reputation.

"Improving the quality of audit to enhance public trust and investor confidence must be paramount. But the guiding star for any reforms must be a focus on what works.

"Mandating joint audits will add cost and complexity for business with no guarantee of better outcomes. Operational splits could restrict access to the skills required to carry out complex audits."

He felt there was "merit" in greater scrutiny of audit committees by the regulator but said the with the Brydon review yet to report, "a false move now could create yet more uncertainty and undermine confidence in corporate Britain".

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