Big Four reject breakup in response to CMA study

An invitation to comment on a Competition and Markets Authority (CMA) audit market study has resulted in the Big Four unanimously rejecting the possibility of being broken up and expressing a range of opinions on market share caps and non-audit service restrictions

In its response, EY proposed ‘that firms auditing public interest entities (PIEs) and large private companies be licensed by an entirely independent regulator and no longer by any of the recognised supervisory bodies. It is important to have an independent regulator to ensure public trust in the regulation of corporate reporting and of those that audit such information’ and said that this regulator’s powers should be ‘expanded to include greater powers of intervention when an auditor is repeatedly failing, including holding both individual auditors and senior managers of firms to account’. Regarding a possible market cap, it warned that there ‘is a risk of distorting competition and damaging audit quality if capacity is not available to take up available audits’.

KPMG also expressed doubts about the implementation of a market cap, saying that ‘significant potential challenges both immediately and in the longer term associated with this measure which would need to be resolved if the CMA were to consider recommending some form of market share cap’. It rejected the idea of an independent regulator, saying that ‘this remedy would remove or largely neutralise competitive forces - presumably on a UK only basis, which would raise further practical difficulties’ and involve a ‘major extension’ of the state into corporate affairs, an opinion shared by both PwC and Deloitte.

PwC welcomed the proposal of a market share cap, but noted that ‘as the CMA acknowledges, this would not be straightforward to implement. A system that in effect creates a segment of the market in which the four largest firms cannot operate would potentially restrict choice for certain companies. The mechanics of how it would be initially introduced, operated and (presumably) then phased out over time would need to be carefully designed and monitored’. It said that it believed that any effective market share cap ‘could only work based on the number of companies and cannot sensibly be based on audit fees’.


In favour


Market Share Cap

PwC, Deloitte


Big Four Break-up


PwC, Deloitte, KPMG, EY

Non-audit service restrictions

Deloitte, KPMG


Joint and shared audits



Independent regulator


PwC, Deloitte, KPMG


It rejected further regulation, saying that ‘ongoing regulatory compliance cost of providing audit services to the largest listed companies is material’ and reducing competition, an opinion that Deloitte concurred with, saying that the ‘cost of regulation and in particular the fear of the impact of regulatory sanctions has acted as a barrier to entry for some firms into the FTSE 350 and PIE audit market’.

Deloitte also supported a market share cap, saying that market share caps ‘if introduced for a set period of time and judiciously planned and monitored, are the only effective mechanism for moving "from four to more", within an acceptable timescale’ and that they will ‘provide a guarantee of other large firms being able to win work in segments in which they have not been able to make sufficient progress to date’.

Non-audit service restrictions were supported by both Deloitte and KPMG, with the latter having already announced that it will be stopping non-audit work for its FTSE 350 clients. Likewise, Deloitte supported ‘a ban on all non-audit work provided by a firm to those FTSE 350 companies and large public interest entity private companies that the firm audits’ but went further to recommend ‘that “audit services” also includes the half-year review, bond offerings, grant applications and reporting on historical financial information in offering circulars’.

PwC rejected this proposal, saying that ‘separate ownership of the audit and non-audit services practices of the UK audit firms would be detrimental to quality’. EY argued that such a restriction could even be detrimental to the market itself, saying that 'providing services to companies the audit firm does not audit provides development opportunities for auditors to broaden their skills, strengthening the audit practice'

On the subject of joint and shared audits, KPMG said that it was ‘not in principle opposed to exploring possibilities in relation to some form of shared (or peer reviews), rather than joint, audits’, noting the ‘potential implications for audit quality’ that this was raised.

Deloitte strongly opposed 'any such proposal that would lead to the split up of the four largest audit firms in the UK whether vertically or horizontally'. KPMG said that it 'agrees with the CMA that the design and implementation of such a measure would present “significant and potentially insurmountable challenges” and it strongly believes that this course of action would be severely detrimental to the overall audit profession'. EY rejected the suggestion in favour of a multi-disciplinary response, while PwC also agreed with the CMA that the proposal posed significant challenges, 'particularly those relating to the effectiveness of the measure in the face of the international networks of the largest firms and the transferability of staff'.

The full list of responses is here 

Report by James Bunney


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