Plans to force FTSE 350 companies to use challenger audit firms have been signed off by the business secretary as pressure for reform mounts, according to reports.
Kwasi Kwarteng wants to push ahead with a proposal to break up the dominance of the Big Four accounting firms: Deloitte, EY, KPMG and PwC – and is looking to secure a legislative slot in the next parliamentary session, according to The Times, which first reported the news.
The reforms would see FTSE 100 and FTSE 250 businesses, whose financials are audited by any of the Big Four firms, forced to appoint a smaller audit firm in addition. The challenger firm would work alongside their larger rival on a company’s audit – a process referred to a “managed shared audits”.
The idea has garnered criticism from both larger and smaller audit firms, with the latter raising capacity concerns about their ability to handle particularly large and complex audits.
The reform package, which has been touted as the biggest overhaul to British audits and corporate governance in generations, follows a series of high-profile corporate scandals and collapses including retailer BHS and Carillion.
But some parts of the anticipated package have been abandoned following a backlash from businesses, including a proposal modelled on the US Sarbanes-Oxley Act, which uses legislation to force directors to sign off on businesses’ internal controls for financial reporting.
Earlier this year it was reported that the new reforms could see directors facing fines, suspensions or even having to return their bonuses in the event of a company collapse or serious director failings.
But now a limited version of the rule, which would also be harder to enforce, is expected instead.
Without legislation binding them, directors will be let off the hook from taking more responsibility for company accounts.
The pared-back version of the rule would also only apply to companies with a premium listing, leaving privately-owned firms free to ignore the guidance.
For accounting firms, who have been at the receiving end of much criticism over failures to raise the alarm before corporate scandals, the move puts more of the onus on auditors.
The proposals were set to be announced by Kwarteng in December but are now expected next month.