Big Four rivals outline recommendations for changing UK audit market

22 November 2018 7 min. read
More news on

Some of the UK’s largest auditing and advisory firms have called for changes to the UK accounting scene, ahead of the Competition & Markets Authority’s industry probe. The Big Four currently hold 98% of auditing work for the FTSE 350, leading Grant Thornton to suggest an independent body should appoint the auditors of top firms, while BDO backed a ‘market cap’ to limit the number of contracts the Big Four can take.

It has become the narrative that refuses to go away for the largest professional services firms of the UK; namely, the allegation that the auditing industry has become woefully uncompetitive, leading to a host of high-profile accounting blunders, has never been far from the headlines throughout 2018. The collapse of Carillion at the start of the year almost certainly acted as a catalyst to this, with the then KPMG-audited outsourcer going bust and leaving the UK Government high and dry with regards to a number of keystone contracts relating to the Ministry of Defence and the NHS, among others.

Following the liquidation of the Wolverhampton-based company, a Parliamentary report by two select committees produced a scathing assessment of the work of KPMG for Carillion; with the firm facing a Financial Reporting Council (FRC) investigation for its role as auditor as well. Members of the Work & Pensions and Business committees also pilloried PwC, Deloitte, and EY in the process, accusing them of “feasting on the corpse” of the doomed business.Big Four rivals outline recommendations for changing UK audit marketKPMG would later be the subject of an unprecedented censure from the FRC, which took the step of taking a quarter of the company’s UK auditing work under supervision. This was not before the watchdog had lambasted the Big Four as a whole for an “unacceptable deterioration” in its accounting standards, however, as the quartet as a whole have also been mired in numerous notable auditing scandals throughout 2018. The stage was ultimately set for the Competition & Markets Authority to announce it would be probing the auditing sector for the first time since its landmark ruling four years ago that UK corporations must re-tender audits every 10 years.

This time, the CMA’s investigation will examine three main areas. These are: how firms choose auditors and the frequency of switching, the resilience of the industry if the Big Four have become "too big to fail", and finally, if there are a lack of incentives for auditors to produce "challenging performance reviews" given that companies, not investors, pick their own auditor. The provisional results of the probe are expected to be released before Christmas 2018.

In anticipation of these results, the UK’s next-largest auditing and advisory firms have been determinedly outlining their hopes for the future of the market. While the next-largest firms beneath the Big Four have all been keen to stress they do not support the ‘break up’ of the industry giants, partially for fear that they could be in line for the same treatment at the behest of mid-tier firms they likewise have pushed out of the market, the major competitors of Deloitte, KPMG, EY and PwC are not short on other ideas.

Change on the horizon?

Before the CMA probe was even announced, Grant Thornton had already issued a call for the introduction of an independent body to appoint auditors to top listed firms. Re-affirming this conviction, the firm has reportedly since informed the competition watchdog that caps on market share would not work, and instead that there was a need for more drastic intervention. Those siding with Grant Thornton here would likely point toward the historic propensity of top businesses to simply replace one Big Four auditor for another, suggesting that a market cap would be unlikely to challenge the gang of four’s supremacy in this regard.

Grant Thornton also pointed to the existence of an independent appointment body in the public sector, saying an “equivalent mechanism” for FTSE 250 appointments, which would be capable of making a positive effect in terms of promoting independence and addressing potential bias in the procurement of audit by large companies in the UK. However, Grant Thornton’s assertion has reportedly puts it at odds not only with two members of the Big Four, but also with close competitor BDO, which has backed restrictions on how many top companies any single firm is allowed to audit.

According to business news site City A.M., BDO’s full response to the CMA saw the firm instead favour a so-called market cap, in which the number of big contracts any audit firms can have would be limited. BDO suggested this would not impact on the dynamism of the market, and would be easily implemented, as “by 2023 no audit firm can act for more than 60 FTSE 350 audit clients… We believe this is the most impactful intervention and could be implemented to have a short term impact as well as create a platform for challenger firms to build capability in the longer term.”

Mazars another mid-tier auditing and advisory firm which could benefit from a potential intervention, supported the calls for such a cap, but further added it was in favour of the introduction of joint audits. The firm’s audit head told City A.M., “The implementation of a cap to total audit market share, allied with a joint audit system, lies at the heart of meaningful reform.”

BDO is apparently sceptical of this, stating, “Whilst this may have a place amongst a package of measures, we do not believe this intervention will have sufficient impact. We retain concerns that joint audits will not be truly joint but include major and minor elements where the Changer Firms will be allocated minor roles.”

Meanwhile, the Big Four firms are also attempting to position themselves to negate the possible impact of the CMA’s findings. Earlier this autumn, KPMG announced that it was pulling out of selling non-audit services to its audit clients, although it is disputed as to whether this was taking place in the first place, as the industry is bound by rules aimed at limiting such conflicts of interest. Regardless, triggered by this show of intent, fellow Big Four firms Deloitte and EY have called for US-style audit regulations that make company bosses take personal responsibility for company accounts.

It is fast becoming clear that public sentiment is turning against the industry, however, and such piecemeal outcomes may do little to sate growing concerns among citizens of the UK. To that end, a recent survey of 1,000 members of the general public by ACCA (the Association of Chartered Certified Accountants) revealed that auditors are increasingly expected to play a crucial role in company safeguarding. 48% of the UK public now believe it is auditors who are responsible for avoiding company failures, while a majority of 65% believe the audit function needs to evolve to prevent company failures in the future. On the basis of this finding in particular, more substantial changes may well be on the way.