FRC seeks to disband the Big Four's audit dominance

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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.”

About Richard Hattersley

Richard Hattersley

Richard is AccountingWEB's Practice Editor. If you have any comments or suggestions for us get in touch.

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19th Mar 2018 17:53

Is that photo of the former KPMG Manchester office?

Its now above the Dutch Pancake House

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By FD-HBC
to AnnAccountant
21st Mar 2018 12:36

I rather like the sign " No loading at any time".... is this a reference to KPMG fees ????????

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By DJKL
19th Mar 2018 20:50

"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."

Surely that is really just can kicking, unless new entrants somehow brought into the market there are still just four, for that to change it surely requires a mentality shift from audit committees re who they will use and acceptance of that choice by shareholders and other stakeholders.

I think independence is weakened by cross selling but that is a slightly different concern to the closed shop re choice issue that only four firms cause.

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20th Mar 2018 09:46

Surely introducing more competition means that margins are tighter for firms and so more corners are cut and it is harder for an auditor to stand up to the client if they can easily move elsewhere.

It still doesn't address the elephant in the room - that the audit firm has a fundamental conflict of interest. The reality is that auditors are appointed by and their fee agreed by the directors, and if they displease the directors then they lose the job. Shareholders do not have any real say.

It's like the judge and jury being appointed and paid by the defendant.

Do we need a system where the auditor is appointed from a panel by the State and so the directors can't sack them?

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20th Mar 2018 18:18

As an ex auditor, the whole set up stinks quite frankly.

its a very hard "so what do we do from here?" but I think the answer has to start at divorcing audit from "other work". Then you may then have to force those 'audit only' firms to split in two. It will take maybe 5 years for the old other halves to actually be separate and you have 8 'old' firms plus the next tier and you actually have a market place rather than an oligopoly.

Then once there, you can maybe go down Jon's route of proper independence with panel appointment for companies, with firms missing out on new appointments for (say) 6 months if they have a scandal so putting some real financial pain on not finding stuff, rather than the current incentive to just not look too hard.

The trouble is the only advisors government has is the very advisory that have a vested interest in it not happening.

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By chatman
21st Mar 2018 10:24

Why not just get all audits done by the NAO?

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21st Mar 2018 10:36

Insolvencies are distributed on a "merry go round" basis, aside from the markedly less than perfect practice in that market why couldn't audits be rotated on a strict time limited basis? Medicean Florence had that principle in it's Gonfaloniere di Giustizia only holding a position for six months to prevent fear, favour, and maladministration.

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By chatman
to moneymanager
21st Mar 2018 10:43

Because audit firms who did other work would still not want to jeopardise their chances of getting other lucrative work by qualifying the audit report.

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