The Competition and Markets Authority (CMA) should aim for the full structural break-up of the ‘Big Four’ firms into audit and non-audit businesses, according to the Business, Energy and Industrial Strategy (BEIS) Committee.
In its report, The Future of Audit, the Committee endorses the CMA’s proposed operational split between audit and non-audit but argues that going further with a structural break-up would prove more effective in tackling conflicts of interest and providing the professional scepticism needed to deliver high-quality audits.
The report also tackles the lack of competition in the audit market and its impact on market resilience, with concerns that it could go down to a Big Three or worse. In 2016-17, EY, PwC, KPMG and Deloitte (the ‘Big Four’ audit firms) accounted for 97 per cent of FTSE 350 audits and 99 per cent of FTSE 100 audits.
To improve resilience and choice, the report recommends a segmented market cap and the use of joint audits, on a pilot basis, for the most complex audits to enable the challenger firms to step up. The report also recommends increasing the frequency of audit rotations to seven-year non-renewable terms and (should the CMA go ahead with an operational split) a cooling off period of three years, in which non-audit services cannot be offered to a former audit client.
Commenting, Chair of the BEIS Committee Rachel Reeves MP 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.
“For the big firms, audits seem too often to be the route to milking the cash-cow of consultancy business. The client relationship, and the conflicts of interest which abound, undermine the professional scepticism needed to deliver reliable, high-quality audits. Splitting audit from non-audit business would be a big step to boosting the culture of challenge needed to deliver high-quality audits.
“Change is needed to deliver for investors, workers and the public. The Big Four may not like it, they may seek to undermine the case for reform, but vested interests should not be allowed to get in the way of positive change. We must not wait for the next corporate collapse. Government and regulators need to get on and legislate to deliver these reforms and ensure that audits deliver what businesses, investors, pension-holders and the public expect.”