Big Four audit firms too powerful, claim MPs post Carillion
MPs are calling for an urgent review into the competition review into the statutory audit market, citing concerns over the lack of competitive tenders, dominance of the Big Four audit firms and an absence of independent scrutiny following the collapse of Carillion, reports Sara White
17 May 2018
MPs on the joint BEIS/Work and Pensions Committee have slated the Big Four, and are calling on government to refer the statutory audit market to the Competition and Markets Authority, which would be the second time the largest UK auditors have faced a major competition probe since the crash in 2008.
The terms of reference of the new review should explicitly consider breaking up the Big Four into more audit firms, as well as looking at the effect of splitting off audit arms from the parts of firm that are providing non-audit services such as tax compliance, accounting and consultancy.
MPs are also hoping that the government’s appointment of Andrew Tyrie, former MP and influential chair of the parliamentary Treasury Select Committee, as chair of the Competition and Market Authority will give the competition regulator the necessary impetus to reopen the earlier closed enquiry or set up a follow-up.
The Department for Business, Energy and Industrial Strategy (BEIS) told Accountancy that the appointment of Tyrie has now been fully approved by all relevant committees and ‘details of a proposed start date will be announced in the next few weeks’.
BEIS also confirmed last month that the Kingsman Review would assess the role, funding and effectiveness of the Financial Reporting Council (FRC) as the UK audit regulator.
A CMA spokesperson told Accountancy: ‘We are working closely with the Financial Reporting Council, whose role it is to regulate the quality of UK company audits, to see what more needs to be done to drive up standards.
‘As part of this, we are actively monitoring the impact of the remedies put in place following the Competition Commission’s inquiry. The CMA remains open to looking further at the audit sector itself and will work with the FRC in support of any action it chooses to take.
The first audit market review, conducted by the Competition Commission in 2011, forced firms to tender their audits every 10 years and aimed to extend competition outside the Big Four. To some degree, the rules were watered down by subsequent EU rules brought in through the Audit Regulation and Directive (ARD).
Lack of competition
Any attempts to open up competition to non Big Four firms to the listed FTSE market have pretty much failed with the latest figures from the Accountancy FTSE 100 auditors survey showing that only one company, Randgold Resources, is audited by a mid-tier firm, namely BDO, and it retained the business in a recent audit retender. However, it is only a small audit in terms of value at £712,000, within a market worth £637m.
In a surprise move, the other major mid-tier audit firm, Grant Thornton, pulled out of tendering for FTSE audits in March, although it does have a strong non-audit service income stream.
Across the FTSE 250, in an audit market valued at the £192m according to the latest Accountancy research, the dominance of the Big Four is paramount at £188.7m market share with less than 2% of the market in the hands of only two mid-tiers - BDO and Grant Thornton – with eight audits between them valued at £3.5m.
Big Four and Carillion
In the case of Carillion, all of the Big Four were earning substantial fees across the board for various contracts.
KPMG was external auditor, Deloitte internal auditor and EY worked on some pre-collapse rescue advisory services. PwC was hauled in to handle the insolvency.
MPs accept that the ‘requirement for “sufficient resources”, which required large numbers of staff to start work on the insolvency within 12 hours of notification, limited the options to the Big Four accountancy firms’.
The committee report stated: ‘Despite PwC’s extensive prior involvement in Carillion, given that KPMG was Carillion’s external auditor, Deloitte its internal auditor and EY was responsible for its failed rescue plan, it was certainly credible for the Official Receiver to consider those other Big Four companies more conflicted.
‘Deloitte’s role with Carillion was not confined to internal audit. Among other roles, they acted as advisors to the remuneration committee, offered due diligence on the disastrous takeover of Eaga in 2011 and then received £730,000 for attempting a subsequent transformation programme at Eaga.
‘Such widespread involvement in Carillion was simply par for the course for the Big Four accountancy firms. Over the course of the last decade, they collectively received £51.2m for services to Carillion, a further £1.7m for work for the company’s pension schemes and £14.3m from government for work relating to contracts with Carillion.
‘EY, another member of the Big Four, were particularly heavily involved with Carillion after the profits warning in July 2017. They were appointed to oversee “Project Ray”, a transformation programme designed to reset the business.
‘Carillion paid them £10.8m over a six-month period,385 in part to identify up to £123m of cost savings, mainly to be met through a 1,720 reduction in full-time UK employees.
‘Those savings were not achieved before the company collapsed. EY also helped negotiate the agreement with the pension Trustee to defer £25m in deficit recovery contributions and a “time to pay” arrangement with HMRC in October 2017 that deferred £22m of tax obligations.
‘As we noted earlier, EY even suggested extending standard payment terms to suppliers to 126 days.388 Their own fees, however, were not deferred. On Friday 12 January 2018, three days before the company was declared insolvent and one day before Philip Green wrote to the government pleading for taxpayer funding to keep the company going, Carillion paid EY £2.5m. On the same day, it paid out a further £3.9m to a raft of City law firms and other members of the Big Four.’
Report by Sara White