Regulators should consider introducing a French-style joint audit system to break the Big Four’s stranglehold on the top end of the market, the industry body said yesterday.
Responding to a fast-moving review of Britain’s audit sector, the Institute of Chartered Accountants in England and Wales (ICAEW) warned the Competition and Markets Authority (CMA) of the dangers posed by bringing about a forcible break-up.
It said there was “a risk that one of the Big Four could either fail, or voluntarily withdraw” from the market for the auditing the UK’s top companies if intervention in the stricken sector were too heavy-handed.
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The ICAEW offered tentative backing to a number of approaches the CMA could take to fixing the sector – which is the subject of intense political and public scrutiny after a series of scandals – including introducing a joint audit system, in which two or more auditors produce a single audit report for which they carry shared liability.
It pointed towards the apparent success of the policy in the French market, noting that the country has more competition for big audit contracts and saying: “There is nothing to suggest that this model is ineffective in France.”
The UK’s audit market has been rocked repeatedly over recent years by a series of scandals linked to perceived auditing failures, including the collapse of department store BHS, and the recent discovery of a black hole in the accounts of cafe chain Patisserie Valerie.
Most significantly, the collapse of mega-constructor Carillion earlier this year led to calls for break-up of the Big Four – Deloitte, EY, KPMG and PricewaterhouseCoopers – all of which had supplied it with services. The firms, which collectively carry out 97 per cent of FTSE 350 audits, have been accused of having a “cartel”-like grip on the market.
The CMA launched a review of audit competition earlier this month, which is running alongside several reviews from inside and outside the sector. It aims to report before the end of the year.
The ICAEW called for a “graduated approach” to change in the sector, which it said would “mitigate the possibility of causing one or more of the Big Four to withdraw from the market or significantly reduce their commitment to it.”
It warned forced any break-up that involved ring-fencing audit with the Big Four could have “significant unintended consequences, that it would be difficult to safeguard against” – adding if firm were split, the audit-only practices created “may find it challenging to attract talented staff”.
Challenger firms, such as Grant Thornton and BDO, needed to be reassured that they would receive smaller repercussions for audit failures, proportionate to their size, if they were to take a slice of the biggest contracts, it said, adding smaller firms feared the “potentially significant reputational and financial damage which they could suffer under the current regulatory regime for performing a poor audit.”
The ICAEW said that companies needed to be more open-minded when picking their auditors, suggesting that: “There may also be a peer pressure issue among FTSE 350 audit chairs not to be out of line with their peers in using the Big Four.”
It said this could lead to a “paradoxical situation” where a challenger firm “needs to grow in size and network to be able to deliver a very large audit, but would need the higher fee income to fund such expansion.”