In Deloitte’s response to the CMA, written by global public policy partner David Barnes, the firm suggests three measures to improve the quality, competition and effectiveness of the audit market. These include a market share cap to address choice and competition issues, a stronger governance structure to address conflicts and a ban on non-audit services provided to FTSE 350 audit clients.

The firm has also called for the introduction of a US-style audit regulation system to increase responsibility for company bosses, stating ‘this will place appropriate accountability on companies’ boards and management to ensure the quality of their financial reporting’.

Deloitte, however, is not in support of an independent body to appoint auditors and strongly opposes splitting the Big Four into eight smaller firms. ‘This proposal would not substantively increase choice. Only four of the newly created UK firms could remain as part of an international network. The choice of firms with an international footprint would not change,’ Barnes writes.

The firm states that the only durable solution to increase competition is the emergence of at least one other large firm as a major competition to the Big Four. However, based on Deloitte’s analysis, a firm outside of the Big Four would need to win 60% of all tenders in the next five years to reach the 20% FTSE 350 target 2023/24.

Due to this the firm believes that audit market caps are the only effective solution to moving beyond the Big Four to a Big Five in a shorter timescale.

Mid-tier firms have a skills and capability gap. To address this Deloitte suggests shared audits where the Big Four would partner with a smaller firm to audit a particular component but the Big Four firm would retain overall responsibility for signing off the audit. However, the firm does not support joint audits.

Deloitte also suggests staff secondments from mid-tier firms to the Big Four and training to smaller firms provided by the Big Four.

In its summary the firm states: ‘We acknowledge that to improve choice, mere incremental changes would not be effective. A remedy package with a market share cap (or caps) at its heart would over time bring about more choice. A set of supporting measures would help to ensure its effectiveness by allowing firms outside the current largest four firms to invest with confidence in their capabilities.

‘However, all of these measures needed to be considered in the context of changes required in the broader financial reporting ecosystem.

‘We look forward to further engagement with the CMA in support of its goal of bringing the right set of changes to the UK audit sector.’

Deloitte's total FTSE 350 non-audit fees for 2017/18 were £43m, this is 28% of total audit fees of £155m. 

Report by Amy Austin