Kwarteng kickstarts Big Four audit shake-up
Difficulties at Bhs were not spotted
Britain’s audit sector faces a major overhaul to improve the scrutiny of big companies which may be in imminent difficulty.
Business Secretary Kwasi Kwarteng has announced a four-month consultation that is likely to see a break up of the Big Four accountants which were criticised for failing to spot early signs of trouble at a number of high profile firms.
Investor and public confidence was shaken by the failure of Carillion, Thomas Cook and Bhs, causing the taxpayer to step in and penalities to be imposed on some of those responsible.
The Government’s proposals would see the creation of a new audit profession overseen by a new regulator, which will aim to drive up quality and standards in the market and increase choice for businesses.
It will mean breaking up the dominance of the so-called “Big Four” firms. Last year, almost a third of FTSE 350 audits inspected were in need of improvement.
Mr Kwarteng said: “Restoring business confidence, but also people’s confidence in business, is crucial to repairing our economy and building back better from the pandemic.
Kwasi Kwarteng: ‘restoring business confidence’
“When big companies go bust, the effects are felt far and wide with job losses and the British taxpayer picking up the tab. It’s clear from large-scale collapses like Thomas Cook, Carillion and BHS that Britain’s audit regime needs to be modernised with a package of sensible, proportionate reforms.
“By restoring trust in our corporate governance regime and encouraging greater transparency, we will provide investors with clarity and certainty, cement the UK’s position as the best place in the world to do business, and protect jobs across the country.”
As part of the Government proposals to improve the audit market:
– Large companies would be required to use a smaller “challenger” firm to conduct a meaningful portion of their annual audit, watering down the supremacy of big-name auditors that put markets at risk whilst boosting jobs and growth of smaller audit firms across the country.
– The Big Four could also face a cap on their market share of FTSE 350 audits if competition in the sector does not improve.
– A new regulator, the Audit, Reporting and Governance Authority (ARGA), which could oversee the largest unlisted companies as well as those on the stock market, will also have the power to impose an operational split between the audit and non-audit functions of accountancy firms, to reduce the risk of any conflicts of interest that may affect the standard of audit they provide.
There are plans to make directors of the country’s biggest companies more accountable if they have been negligent in their duties – reflecting the level of responsibility that comes with holding such a position.
Minister for Corporate Responsibility Lord Callanan said: “Audit failure isn’t an abstract problem, it has real life consequences.
“Thousands of jobs have been lost in the wake of collapses like Carillion, and many more lives impacted, while wider confidence in big business is undermined.
“Auditors and rogue directors who have been asleep at the wheel must be held accountable. So, as part of our plans, we will look to ensure the new regulator is fully equipped to take action where serious lapses have occurred.
“We are grateful for the work of Sir John Kingman, Sir Donald Brydon and the Competition and Markets Authority, whose inquiries provided much insight and made clear the case for reform.”
The Government’s consultation takes forward the vast majority of recommendations made by three independent reviews into auditing and corporate reporting: the Independent Review of the Financial Reporting Council (FRC) led by Sir John Kingman; The Independent Review into the quality and effectiveness of audit, led by Sir Donald Brydon; and the Competition and Markets Authority’s Statutory audit services market study.
Sir Donald Brydon said: “I welcome the Government’s consultation and am pleased that they have accepted the core principles and the majority of the recommendations of my 2019 Review. I would urge all participants to engage with the important detail in this paper. The need for progress on these reforms remains urgent.”
Sir John Kingman added: “Since my 2018 report, much has already been done to strengthen regulation of UK audit, reporting and governance under new leadership at the FRC.
“The critical missing piece is to fix the regulator’s legal status and powers. I therefore very much welcome the Government’s consultation, and look forward to seeing this followed through with legislative action as soon as possible.”
Ed Miliband, Labour’s Shadow Business Secretary, expressed concern that some of the recommendations for change had not been picked up.
“There are real questions about whether this package is sufficient to reform the broken audit market,” he said.
“There are some proposals we welcome, including tougher penalties for individual company directors where there are serious failings.
“However it is regrettable that on the crucial issue of competition in the audit sector, the package waters down some of the independent recommendations for reform, including on mandatory joint audits between the big four and challenger firms.
“The option of a structural split between the audit and non-audit parts of business practises must be kept on the table.”
Matthew Fell, CBI UK chief policy director, was more supportive of the proposals. He said: “The new audit and company reporting regulator, and a new audit profession should inject focus and momentum behind efforts to maintain the highest possible standards.
“Furthermore, an increasing emphasis on non-financial information, especially climate, will help provide a rounded view of firms’ performance; underscoring efforts to build back better
“But many businesses are still to be convinced that mandating shared audits will get to the heart of the issues around rigour and quality, not just add complexity.
“It’s welcome that the Government has thought carefully about directors’ accountability, rather than simply copying the more burdensome aspects of the US-style regime. Nonetheless these measures will require careful implementation to be meaningful without stifling entrepreneurial spirits.”