The Big Four’s stranglehold over audit could soon be loosened if the FRC gets its way. After audit scandals such as Carillion and Bell Pottinger in South Africa, the financial regulator now wants the Competition and Markets Authority (CMA) to investigate the Big Four’s audit dominance.
According to the Financial Times, FRC’s chief executive Stephen Haddrill has already made a case to the CMA for "audit only" firms to increase competition in the market, which would force the Big Four to divorce their audit arms into separate businesses.
“There is a loss of confidence in audit and I think that the industry needs to address that urgently,” Haddrill told the FT. “In some circles, there is a crisis of confidence.”
Although Haddrill recognised some of the “remedies” the Competition Commission has introduced to encourage more competition, he concluded that despite this “there is no more competition”.
Figures from research firm Manifest demonstrate the Big Four’s audit dominance: PwC, EY, KPMG and Deloitte audit 97% of the FTSE 350 companies.
Haddrill’s call for a Big Four audit probe comes after MPs accused the Big Four firms’ of “feasting on what was soon to become a carcass” of Carillion – with these firms charging £71.6m in work to the beleaguered government outsourcing firm before its collapse.
The FRC has also launched an investigation under the audit enforcement procedure into KPMG’s audit of Carillion on 29 January this year.
The idea of imposing sanctions against the Big Four for its failed audit work has become a hot topic for the FRC as of late. Last November, an independent review suggested that an appropriate penalty for “seriously bad incompetence” from one of the Big Four was a financial penalty of £10m or more. A fine of that magnitude would dwarf the record £5.1m fine imposed on PwC last August after its failed audit of the collapsed firm, RSM Tenon.
PwC said it was open to ideas and welcomed more players in the large audit market. Meanwhile, KPMG did push back against separating audit from its consulting business, as “multi-disciplinary firms deliver more benefits for investors and society”.
While Haddrill's remarks naturally put the spotlight on the Big Four, the CMA's response didn't suggest an immediate overhaul: “We are actively monitoring the remedies put in place following the Competition Commission’s inquiry," it said. "This monitoring is ongoing and the [authority] remains open to looking further at this sector in the future.”
But fair tax campaigner Richard Murphy has proposed for similar measures to be imposed against the FRC too.
“If there is a problem with auditing now it must have taken time to develop," said Murphy on his blog. "And if so it happened on the watch of the FRC, which is an organisation riddled with membership from the Big Four creating massive conflicts of interest that are at the heart of the crisis of confidence to which the FRC refer.
“This is not a time to just reform the Big Four: it is a time to sweep the whole failed structure of UK auditing aside and to start again.”