A leading academic and member of the House of Lords has condemned calls by a UK accounting body for reforms of the cap on non-audit work undertaken by big audit firms.

Lord Prem Sikka, emeritus professor of accounting at the University of Essex, was taking aim at efforts by accountancy body the ICAEW to persuade the government that “ESG audits” should not be included in the calculation of non-audit work for audit clients.

Currently, non-audit work is capped at 70% of the audit fee.

Lord Sikka said: “As usual, the ICAEW is batting for big accounting firms whilst people clamour for independent and effective audits of company accounts. In any case, accountants have no particular expertise for reporting on ESG matters.”

European divide

The comments come after ICAEW chief executive Alan Vallance told the Financial Times that UK audit firms were at a disadvantage compared with European counterparts, where ESG commissions are not included in the non-audit work calculation.

The FT reports that Vallance has spoken to the business secretary Jonathan Reynolds about the matter, as well as to employment minister Justin Madders and Richard Moriarty, chief executive of the Financial Reporting Council (FRC).

Lord Sikka’s intervention comes just a week after a report from the FRC, revealing that the Big Four audit firms already dominate 40% of the sustainability assurance market in the UK, up from 33% in 2019.

The report warned that the Big Four’s success could limit the choice of sustainability assurance providers to companies.

“There is a growing preference amongst companies to use the Big Four audit firms (Deloitte, EY, KPMG and PwC) to carry out sustainability assurance in the UK market, which could have implications for future choice.”

The issue mirrors long-running worries that the Big Four dominate the market for large financial audit, which has reduced choice of auditors available to boardrooom audit committees.

Growth agenda

Vallance’s talk of new rules for audit firms comes at a time when the government is looking for ways to reduce the regulatory burden on companies to promote growth.

Regulators across the business sector have been invited to propose how they will help UK economic growth. In a keynote speech, chancellor Rachel Reeves has said the UK suffers from “stifling and unpredictable regulation”.

The audit sector is still waiting on an audit reform bill, anticipated since a number of market reviews following the collapse of construction giant Carillion in 2018.

The bill is expected to create a new regulator—the Audit, Reporting and Governance Authority; introduce new powers to sanction audit committee members for failures on audit and reporting; and, potentially, restructure the audit of large companies to include two audit firms in a process of “managed shared audit”.

However, though mentioned in the King’s Speech—the UK’s legislative agenda—a bill has yet to be published, while speculation has emerged that ministers will water down the expected measures.