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Reeves: 'we can't wait for next collapse'

Big Four ‘cash cow’ accountancy firms face break up

Bhs Glasgow

The collapse of companies such as Bhs prompted concerns over auditors (pic: Terry Murden)


 

Big Four accountancy firms should be split into audit and non-audit businesses to loosen their grip on the market and tackle failures in the system, according to a committee of MPs.

Deloitte, EY, KPMG and PwC monopolise the auditing of big companies while also providing them with other services. The Competition and Markets Authority (CMA) has already proposed an internal division between the two functions but has stopped short of recommending a full separation.

MPs on the Business, Energy and Industrial Strategy committee (BEIS) now want a full structural break-up of the firms following investigation into company collapses such as construction firm Carillion and the high street retailer Bhs. The Financial Reporting Council (FRC) has opened an investigation into KPMG’s audit of Carillion.

The four main players audited all but one of the UK’s 100 biggest listed companies last year. In its report, the BEIS committee said a  break-up of the Big Four would “prove more effective in tackling conflicts of interest”.

Rachel Reeves, who chairs the committee, said: “For the big firms, audits seem too often to be the route to milking the cash-cow of consultancy business.

“The client relationship, and the conflicts of interest which abound, undermine the professional scepticism needed to deliver reliable, high-quality audits.”




Ms Reeves said vested interests should not be allowed to get in the way of positive change, adding: “We must not wait for the next corporate collapse. Government and regulators need to get on and legislate to deliver these reforms and ensure that audits deliver what businesses, investors, pension holders and the public expect.

“Change is needed to deliver for investors, workers and the public. The big four may not like it, they may seek to undermine the case for reform, but vested interests should not be allowed to get in the way of positive change.”

The committee has called for joint audits for the most complex cases, “to enable the challenger firms to step up”.

Department store chain Bhs collapsed in 2016 after being sold for £1 a year earlier. A partner at PwC was subsequently banned from the industry for signing off on the accounts of Bhs prior to the sale.

Carillion sign

Carillion’s collapse was seen as a call to action (pic: Terry Murden)


Last year the BEIS select committee heavily criticised KPMG’s role as auditor of Carillion, the outsourcing giant that collapsed at the start of 2018.

Howver, the CBI accused MPs of being “heavy-handed” and warned that “rushing to simplistic” changes would damage the UK’s reputation.

“The committee’s idea to force a break-up of the big four jumps the gun,” Josh Hardie, the CBI’s deputy director-general, said. “It puts forward a heavy-handed solution rather than waiting for the evidence of the reviews investigating the state of the current market and future vision for audits.

Michael Izza, chief executive of the Institute of Chartered Accountants in England and Wales (ICAEW), said the report made “many sensible suggestions” but he did not agree that the Big Four accountancy firms should be broken up.

“We are concerned that some of its ideas for reducing conflicts of interest, such as the break-up of the largest multi-disciplinary firms, might prove counter-productive,” said Mr Izza.



“This could both drive out incumbents and discourage new entrants and it would be unfortunate if an attempt to guarantee the independence of audit firms ended up undermining the resilience of the audit market.”

A KPMG spokesman said the BEIS Committee’s report showed that “trust in audit is in urgent need of repair”, adding: “We have been open about the need for change and we want to play a leading role in building a strong, sustainable and trusted audit sector for the future.”

Deloitte’s UK managing partner for audit, Stephen Griggs, said: “We welcome many of the [BEIS Committee] recommendations, including extending the scope of the audit and better regulation of audit, but we have concerns about a potential structural split.

“This will be detrimental to audit quality and could materially damage the UK’s competitive position as a leading capital market.”

PwC warned that breaking up the big four would weaken resilience, increase costs and damage the UK’s global competitiveness. “We recognise the need for reforms which will enhance audit quality; however, the report’s recommendation to break up the largest firms risks hampering, rather than enhancing it,”

 



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