One of the UK’s senior governance regulators has held meetings with a view to launching an inquiry that would examine whether the Big Four accounting firms should be broken up to create audit-only providers.
Stephen Haddrill, chief executive of the Financial Reporting Council (FRC), has held three meetings with the Competition and Markets Authority (CMA) discussing the potential for a probe that would examine the domination of the UK audit market by the Big Four Firms—PwC, Deloitte, EY and KPMG—and ask whether their audit businesses need to be separated from other services such as consultancy and tax advice.
Board Agenda understands that the FRC is concerned that public confidence in, and understanding of, audit remains low.
It is also concerned that the Big Four currently audits 97% of FTSE 350 companies, an increase on the 95% in 2012–2013 when the then-Competition Commission undertook its last investigation.
In 2016 a host reforms were introduced via the EU Audit Directive, which included retendering of audit contracts every ten years and forced rotation every 20 years.
However, regulators believe that the current state of the audit market means these reforms would give companies a choice of only three other auditors, and fewer if the company works in a specialised area.
Smaller audit firms also face high costs to bid for contracts, which is unattractive if there is a high chance of failure.
The Financial Times quotes Haddrill as saying that the audit industry needs to address the loss of confidence “urgently”.
Hadrill added that remedies so far introduced have failed to increase competition.
The move comes after the FRC was accused of being “useless” and “toothless”, by MPs on the House of Commons inquiry into the collapse of construction giant Carillion.
Answering questions from a committee of MPs in January, Haddrill defended the role of the FRC in examining financial reports.
Haddrill told the committee that he believed the audit rules introduced in 2016 may not improve, but potentially undermine competition among audit firms.
Tim Bush of the shareholder advisory body Pirc criticised the FRC.
“This appears to be policy making on the hoof,” he said. “You would expect such an announcement to come from the Competition and Markets Authority. This is about protecting the FRC’s position given recent criticism from parliamentary committees.”
The FT quotes the CMA as saying that its monitoring of the audit market was “ongoing” and that it “remains open” to further investigation of audit in the future.