Saturday 25 January 2020 4:11 pm

Audit regulator proposes challenger firms get larger share of the work

The Financial Reporting Council (FRC) has proposed a regime to the government that would see challenger firms outside the so-called big four auditors be given a substantial proportion of the audit work of major British companies.

The accounting regulator has drawn up plans behind closed doors that would require all but the very biggest FTSE-350 firms to include at least one challenger firm in their audit tender process, Whitehall sources have told Sky News.

The FRC has described it as “managed shared audits”.

It would require work equating to a substantial minority of the audit fee be undertaken by a smaller rival if one of the big four firms – Deloitte, EY, KPMG and PwC – are appointed.

A substantial minority could be as much as a third of the audit work, a City figure told Sky News.

However, the main auditor would retain responsibility for signing off group accounts.

The plans would also give the FRC the power to intervene in the audit process and ensure challenger firms were allocated a sufficient amount of audit work.

The FRC is to be replaced by the Audit, Reporting and Governance Authority (ARGA) in the near future.

The regulator is hoping the policy change will give challengers like BDO, Mazars and Grant Thornton the ability to transform into credible contenders for the largest audit mandates.

According to City sources, this constitutes a formal response to a recommendation made by the Competition and Markets Authority last year that there be a “mandatory joint audit”.

However, that idea has largely been dismissed by government and blue-chip firms alike as being unrealistic, in part due to requiring two separate sign offs.

A senior corporate figure told Sky News the FRC’s new proposal was “a sensible compromise that included the right degree of reform without causing chaos in boardrooms”.

A FTSE-100 finance chief claimed the government was likely to agree to the proposal due to it originating from a watchdog.

However, an exemption is being considered by the regulator to the FTSE-100’s largest multi-national firms due to their size and complexity.

The FRC declined to comment on Saturday.