Big Four warn against breaking up UK audit firms

The UK’s largest accounting firms and their trade associations have warned Britain’s competition regulator against breaking up the audit market, saying that it could affect the economic viability of auditors and undermine the quality of their work.

The industry was responding to an investigation of the audit market launched last month by the Competition and Markets Authority to address mounting concern about conflicts of interest in the sector.

The review’s suggestions on how to restore trust in the scandal-hit sector included capping the market share of the largest groups in the FTSE 350 audit market; introducing a joint-audit system; and establishing an independent body responsible for appointing auditors to listed companies.

There was disagreement over most of the proposals, highlighting deep divisions within the industry, but the Big Four — Deloitte, PwC, EY and KPMG — as well as their challenger rivals and trade groups were united in their opposition to any kind of break-up of auditing firms.

Politicians, academics and regulators have called on the CMA to consider breaking up the Big Four in an attempt to reduce their hold on the market and address concerns about conflicts of interest and poor audit quality in the wake of the collapse of government outsourcer Carillion, as well as other accounting scandals at major British corporates including Tesco and BT.
Reservations about a forced break-up

The CMA has already indicated it has reservations about a forced break-up of auditors, which would involve either dividing the Big Four into eight smaller firms that carry out consulting and auditing, or forcing the firms and their smaller rivals to form “audit only” groups that have no ties to their consulting arms.

The industry is opposed to both options. The Association of Chartered Certified Accountants (ACCA), which represents professionals working in the sector, said the creation of “audit only” firms would be “very problematic”, while Big Four firm Deloitte went a step further, saying it would be “enormously detrimental to audit quality”.

Deloitte’s Big Four peers, KPMG and EY, as well as smaller rivals BDO and Grant Thornton and the ICAEW, the largest professional body for the industry, also voiced concerns about the proposal.

They pointed out that firms operated as global partnerships and could not break out an audit-only operation in the UK. They also said that the quality of audits was improved when auditors could draw on the expertise of colleagues from different divisions. BDO questioned whether it would be “economically viable” to operate as an audit-only firm.

EY said: “A modern audit of an international mining group routinely involves more than 10 different areas of specialist expertise in addition to auditors with mining sector expertise. This necessary expertise, and overall capacity to deliver audit quality is improved by professionals gaining experience on companies the firm does not audit.”
Call for ‘audit only’ firms

However, a group of academics and audit experts — which include Atul Shah, professor of accounting at the University of Suffolk, and Richard Murphy, a chartered accountant and tax campaigner — urged the CMA to consider creating audit-only firms to “reduce the opportunity for . . . conflicts of interest”.

It also recommended that the Big Four should then split their remaining audit-only practices to create eight smaller firms solely focused on auditing. This would address concerns over the continued dominance of the Big Four.

In its submission to the CMA, the group said: “We believe that the culture and ethics of auditing have failed miserably at too high a cost to society. In particular, we suggest that the [Big Four] have failed to make integrity, sincerity and transparency central to their culture, despite being given [an] effective monopoly to audit large corporations.

“These firms have become entirely profit-oriented commercial entities, helping clients to secure public contracts and assets whilst avoiding taxes on an industrial scale. In the process, they have also produced a generation or more of professional accountants who have gone on to run big corporations with this culture and values, so spreading the virus.”
Fees would need to rise

The Local Authority Pension Fund Forum (LAPFF), which represents 79 local government pension funds with a combined £230bn of assets under management, also supported the creation of audit-only firms, even though they would likely charge higher audit fees in order to survive. “If that were to have a positive effect on audit quality, that should be a cost worth paying. The wider impact of audit failure can be seen in certain banks, and more recently the collapse of Carillion,” it said.

Many respondents, including KPMG, Deloitte, BDO, Mazars and the Institute of Chartered Accountants in England and Wales (ICAEW), also agreed with a proposal to establish some form of cap on market share, which could prevent any firm from auditing more than 60 FTSE 350 companies, although it was opposed by EY, Grant Thornton and the LAPFF.

There was, however, little support for a Grant Thornton proposal of an independent body to select auditors as a way to address concerns about Big Four bias among audit committees at large listed companies. EY, Deloitte, BDO, the ICAEW and the ACCA all opposed the suggestion.

“This proposal would be a very wide-ranging change to corporate governance and would have significant, very possibly detrimental, impacts. We do not support this proposal. We can see only risks and costs,” said the ACCA in a statement.

The CMA is due to publish its provisional findings by December and issue a final report within six months.

Source: Financial Times

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