MPs call for major overhaul of Big Four audit firms

MPs and regulators are increasing the pressure on the Big Four to address claims that the audit market is ‘broken’, citing a lack of competition and poor quality auditing, amid calls for action from the Competition and Markets Authority (CMA) to address the issues, reports Pat Sweet

The joint work and pensions and business, energy and industrial strategy (BEIS) select committee which investigated the collapse of outsourcer Carillion has published a series of letters from firms and others who gave evidence to its inquiry, outlining their responses to its findings.

Rachel Reeves, chair of the BEIS committee, said: ‘Even the Big Four have started to recognise that business cannot go on as normal, with investors losing faith in the accounts, a woeful lack of meaningful competition, and consulting and auditing relationships that are far too comfortable for the public or investors to expect any real challenge.

‘The CMA needs to closely examine the audit market and as a committee we will be keen to see what remedies are proposed to fix the broken audit market.’

In its response, Deloitte said it was opposed to suggestions that the largest professional services firms should be broken up. Its letter stated: ‘We do not believe that this is a viable solution to either matter and would be concerned that it would damage both audit quality and the UK’s position as an attractive capital market.’

Deloitte stated: ‘Larger, more diverse firms are more financially independent and are therefore far better positioned to objectively and robustly challenge the largest companies that they audit and to make the significant investments required in systems and technology.’

Bill Michael, chairman and senior partner at KPMG, which was Carillion’s auditor, indicated the firm was not in favour of a change of model.

His letter stated: ‘We do not share the view that changing the audit market structure is the key to driving up quality but we will, of course, take part in any debate on these complex issues, in whatever forum is most appropriate, with a view to exploring workable solutions.

‘As I hope you would agree, we all need to be confident that changes are made only where this will improve – or certainly not be to the detriment of – audit quality.’

However, Michael agreed that ‘a wider debate is needed regarding the role of audit and, in particular, the reasons for any difference between that role as prescribed in relevant professional standards and guidelines on the one hand, and the public expectation of what an audit should be able to achieve on the other.’

PwC said EU rules requiring companies to change auditors regularly and limit the other services which a company’s auditor can provide ‘have driven innovation and increased the focus on audit quality but have not increased choice in the large company audit market’.

The firm said the limited options for choice which are currently available ‘reflect the size, scale and expertise required by large organisations in their statutory audit’.

PwC said: ‘The committee’s recommendation to break up the large firms would not solve the problems of audit effectiveness or the “expectation gap”. A break up could also harm audit quality when it is imperative that any solution has this as a priority.

‘The delivery of a high quality audit requires audit teams who are able to access a broad base of specialist knowledge (within the UK and internationally). This would be difficult to maintain in a firm which focused only on audit services.’

Frank Field, chair of the work and pensions committee, said: ‘“Once again, the fingers are out pointing everywhere but here. The Big Four admit there is a problem but insist their break up is no part of the solution.

‘How the CMA deals with the lack of audit competition will be the sign of whether the new chairman is able to break this existing culture and impose a new one which makes clear that his organisation is about delivering for individuals, and not for cosy oligopolies.’

Separately the Treasury select committee looking at the work of the Prudential Regulation Authority (PRA) heard evidence from Sam Woods, its chief executive, that the regulator also had concerns about the dominance of the Big Four.

Woods told MPs that it was ‘a bit of a worry’ that the Financial Reporting Council had single out issues with poor audit quality at the Big Four in its annual report, particularly in banking audits and drew attention to the ‘ever more concentrated’ pool of large auditors with the capacity to audit the UK’s biggest companies.

‘It is a worry, and the concentration issue is a worry. The audited numbers feed directly into the capital framework,’ Woods said.

Carillion: Responses from Interested Parties to the Tenth Report of the Business, Energy and Industrial Strategy Committee and Twelfth Report of the Work and Pensions Committee is here.

Report by Pat Sweet

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