Break up Big Four accounting firms, say MPs

MPs have called for the Big Four accountancy firms to be broken up following a spate of high-profile accountancy scandals.

The Competition and Markets Authority last December proposed an operational split between audit and non-audit services at accounting firms, but stopped short of more radical action. Another review, by Sir John Kingman, at the same time recommended abolishing the Financial Reporting Council as audit watchdog, to be replaced with a new statutory body.

But the Business, Energy and Industrial Strategy Committee, following its own probe into the auditing profession, has now gone further than both the CMA and Kingman.

In a report published on Tuesday, the Committee said action was needed and called for the “full structural break-up of the Big Four firms into audit and non-audit businesses”.

Rachel Reeves MP, chair, 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.

“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.”

The report found that in 2016/17, EY, PwC, KPMG and Deloitte accounted for 97% of FTSE 350 audits, and 99% of FTSE 100 audits.

The report is recommending a segmented market cap and the use of joint audits, on a pilot basis, for the most complex audits to better improve competition. It also calls for increasing the frequency of audit rotations to seven-year, non-renewable terms with a cooling off period of three years, during which non-audit services cannot be offered to a former audit client.

The Committee also said it rejected attempts by auditors – “particularly the Big Four and Grant Thornton” – to paint the crisis in audit as a perception problem arising from an expectation gap, arguing that 27% of audits in 2017/18 failed to meet quality standards set by the FRC.

“Change is need to deliver for investors, workers and the public,” added Reeves. “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.”

The Committee launched its investigation on the future of audit earlier this year. It was prompted by a spate of high-profile corporate collapses and accounting scandals. KPMG is currently being investigated over its audits for government contractor Carillion, while Grant Thornton is being probed over its work on café chain owner Patisserie Holdings.