Britain’s competition watchdog has launched a review of the UK’s auditing business after a series of scandals, including the collapse of BHS and the construction group Carillion.
The Competition and Markets Authority (CMA) said it would investigate whether the auditing business, which is dominated by the big four accountancy firms, is “competitive and resilient enough to maintain high-quality standards”.
There have been calls for the big four – Deloitte, EY, KPMG and PwC – to be broken up, amid growing concerns over their dominance and conflicts of interest between their business divisions. The four firms audit all but one of the companies in the FTSE 100 index and 98% of the businesses in the FTSE 350. This year Grant Thornton, the UK’s fifth largest accountancy firm, said it would stop bidding for audit work because it could not compete with the big four.
The CMA chair, Andrew Tyrie, said: “If the many critics of the audit process are right, it is not just the companies which buy audits that lose out; it is the millions of people dependent on savings, pension funds and other investments in those companies whose audits may be defective.”
The competition body will focus on three main areas: the ability of companies to choose and switch auditors; the risk that the big four are too big to fail; and the potential lack of incentive for auditors to challenge companies because directors, rather than shareholders, select their auditor.
If the CMA finds there are competition issues, it could force companies to separate their audit from non-audit activities. Andrea Coscelli, the CMA’s chief executive, said the watchdog planned to issue its provisional findings before Christmas.
This year, in a damning report about the demise of Carillion from two committees of MPs, the big four accountancy firms – who were paid £72m by the outsourcing and construction business in the 10 years leading up to its collapse – were accused of operating a “cosy club”. The MPs, from the business and work and pensions select committees, accused KMPG of being “complicit” in signing off Carillion’s “increasingly fantastical figures”.
The business committee chair, Rachel Reeves, said in the report that the big four had a “parasitical” relationship with companies they were meant to scrutinise.
Reeves, along with the Institute of Chartered Accountants in England and Wales and several accounting firms, welcomed the CMA review. She said: “The collapse of Carillion was only the latest sign of a broken audit market. Investors are losing faith in the quality of accounts and the lack of meaningful competition creates conflicts of interest at every turn.”
She urged the watchdog to end “the stranglehold” of the big four and consider forcing them to break up.
Bill Michael, chair and senior partner at KPMG UK, said: “I have been honest that the industry faces challenges. We all want to build trust in corporate Britain .”
But he opposed the idea of forcibly separating audit from non-audit activities, saying there were “clear benefits to audit quality and the capital markets by being a multidisciplinary firm”.
The CMA review comes a day after the Financial Reporting Council, the UK’s audit watchdog, set out a series of possible reforms, including banning the big accountancy firms from earning lucrative consultancy fees at businesses they also audit.
The FRC also severely rebuked the top firm KPMG, which earned about £1.5m a year for signing off Carillion’s accounts.
In June, PwC was fined a record £6.5m over failings on its audit of BHS two years before its collapse.
The FRC is also the subject of a government review, overseen by Sir John Kingman, the chair of Legal & General and a former top Treasury official, to determine whether the regulator is fit for the future.
