Things could be 'much worse' for Big Four if they oppose audit reforms

With pressure still building on the UK’s auditing watchdog to address the number of accounting scandals toppling British companies, Big Four firms have been fired a blunt warning. Speaking to Parliament, the Financial Reporting Council’s Chairman-Designate has suggested big changes may be on the horizon if things do not improve.

The Big Four of PwC, Deloitte, KPMG and EY are the largest audit and advisory firms in the UK. In recent years, they have been at the centre of a number of major book-keeping scandals, as well as the focus of a series of inquests, and the recipients of a number of record fines over the last three years. High-profile cases have included Thomas Cook, Silentnight, Autonomy and Carillion, among others.

In spite of this, the Financial Reporting Council (FRC) is still seen publicly as struggling to bring the industry to heel. Hefty fines still pale in comparison to the profit margins of the Big Four in particular – and on more than one occasion, the watchdog has been branded “toothless” as a result.

In order to challenge the declining quality of major audits in the UK, the FRC has recently been pushing for a series of structural reforms to the industry. Proposed changes to UK professional services include shared audit proposals, in order to break up the alleged oligopoly of the Big Four in the sector. However, leaders among the Big Four have unsurprisingly been hostile to the proposals – which they suggest could result in doubling down on work, increased costs for business, and a failure to improve the standards which were in large part why reform has become so prevalent on the financial secretary’s agenda.

In response to these claims, the FRC’s Chairman-Designate has issued a thinly-veiled warning to the firms. While being questioned by MPs on the business select committee, Jan du Plessis said of Big Four firms that "the outcome could be much worse for them" if they are not forthcoming in improving the audit industry. Du Plessis is the incoming Chairman for the FRC, subject to MP approval, and is in favour of shared audit proposals.

Mid-market support

While the industry’s largest operators are resistant to change, smaller competitors are more supportive of a shake-up. Supportive structures for smaller and mid-size firms may allow for the continued, seamless disruption of the sector, improving standards and removal of problematic conflicts of interest in the process.

Theta Global Advisors Partner Chris Biggs argued, “There have been three independent reviews so far and major failings are still happening with the Big Four's current monopoly. The new potential incoming chairman has certainly re-energised the push, but we need to now see more action if the issues are to be solved effectively and for the long-term. Independence of the Big Four's audit and consultancy services is crucial. We cannot risk jeopardising the independence of the audit because of lucrative consultancy services provided to the same client.”

At the same time, while the potential issues around the shake-up have been made clear, Biggs remarked they were “no reason to shy away from much needed reform.” Indeed, mid-tier firms assert that the previous dominance of Big Four operators has led to a fall in the number of auditor-independent advisors. Changes in audit regulation may expose this shortage, and present opportunities for new professional service firms.

Biggs added, "At Theta Global Advisors, we do not audit and hence, we are one of the few truly independent accounting advisory firms for non-audit services. Mid-sized firms such as ours that are disrupting the industry in a truly unprecedented manner are seeing great success having worked on major accounts this year. Proposals for shared audits working with the Big Four is just one way we can seamlessly diversify the sector, with mid-sized firms having shown they can take on previously inaccessible large clients throughout the pandemic already.”