CMA calls for audit market cap but stops short of Big Four break-up
The Big Four audit and advisory firms face an unprecedented limit to their market share, following the conclusions of a probe by the UK’s competition ombudsman. If it comes to pass, the market cap which the Competition and Markets Authority is proposing will allow smaller rivals to eat into the market share of Deloitte, KPMG, PwC and EY.
The world’s four largest accounting and consulting firms have endured a tumultuous 2018 in the UK, having been beset by a host of scandals relating largely to their auditing work. In spite of this, however, the quartet continued to dominate the market, and enjoyed bullish results throughout the year.
This was perhaps best exemplified by professional services giant KPMG, which reported a leap in profits in the UK. Earlier in the year, Bill Michael, Chairman of KPMG’s UK business, had confessed to the press, “we are an oligopoly – that is undeniable…”, and the news that the average pay of its Partners rose to more than £600,000 each, even after the company’s role in the collapse of Carillion, and a host of other accounting debacles, will not have gone un-noticed in relation to that statement.
The news came months after MPs lambasted KPMG as being part of a “cosy club” and “complicit” in the run-up to the Carillion’s liquidation, and detractors of the Big Four suggested it lent further credence to the argument that the UK’s auditing scene is bereft of meaningful competition. The Big Four of KPMG, EY, Deloitte and PwC have attracted constant collective criticism from politicians and regulators, who have even called for them to be broken up. The Competition & Markets Authority (CMA) was subsequently tasked with probing the market to weigh up whether such action would be necessary.
Now, with the findings of the probe due to be released before the New Year, a regulatory shake up is reportedly on the cards. As originally reported by Sky News, the CMA is preparing to recommend a series of remedies to bolster competition in the audit sector following its two-month market study. While its recommendations are expected to stop short of demanding a full break-up of the dominant quartet – something Deloitte, EY, KPMG, PwC and a number of their largest competitors are thoroughly opposed to – the watchdog has accepted the need for a cap on the portion of the market each firm can hold.
While the main recommendations remain subject to change ahead of their formal release, senior figures in the auditing profession are understood to have already learned of the move from the CMA. Sources have since confirmed to the British press that the Big Four face an imposition of a cap on the number of large listed companies that they can audit, while a joint audit model for large listed companies will be adopted. Both these policies were championed by mid-market auditing leaders Grant Thornton, Mazars and BDO during the probe.
Accounting versus consulting services
New steps to improve the accountability of the boardroom audit committees of companies – including giving regulators jurisdiction over them – could also form part of the CMA's proposals. At the same time, while the forcible break-up of the Big Four looks to be off the table for now, an advisor to one Big Four firm told Sky News that the CMA may yet leave it open as a fall-back option.
Commenting on the findings, Tamzen Isacsson, the newly installed Chief Executive of the Management Consultancies Association, said, “We are pleased to see the CMA review has recognised the restrictions already in place in companies to avoid conflicts of interest... We support smart and effective regulation that benefits clients and we are pleased to see the CMA isn’t in favour of a structural break up of companies which would be impractical to manage given these are massive global organisations. Our members remain fully engaged with the consultation process to ensure clients… continue to receive excellent consulting services which deliver the outcomes clients seek and need.”
The recommendations are a significant step up from another CMA probe of late. That investigation into the UK’s wealth investment market saw the body accused of lacking the will to act, with one irate source stating, “The CMA has just subjected a whole industry to huge costs and a massive burden in complying with all the information requests – and come up with a paper tiger.”
The CMA's findings have been submitted to the UK Government, and their implementation is now a matter for the cabinet to contemplate. Elsewhere, the Financial Reporting Council (FRC) also said recently that it was engaged in a separate piece of work to weigh up "whether further actions are needed to prevent auditor independence being compromised, including whether all consulting work for bodies they audit should be banned."
