Shadow chancellor John McDonnell today promised to break up the “cartel” of the Big Four accounting firms if Labour wins the upcoming election.
“Under Labour the Big Four companies will not be allowed to continue to act like a cartel,” McDonnell told a Westminster audience during a speech on Labour’s plans for the economy.
The Big Four of PwC, Deloitte, KPMG and EY have previously pushed back against proposals made by the Competition and Markets Authority (CMA) to introduce an operational split between their audit and non-audit arms.
Labour’s plans would go further, introducing a structural split between the Big Four’s audit and non-audit businesses and a ban on auditors selling any non-audit services.
McDonnell also detailed plans to introduce a statutory auditor that would examine the books of banks, insurers and other financial institutions.
“The auditor will not be dependent on fees from client companies, and as a result, could become, I believe, independent and robust,” he said.
He also called for audit tenders to be made publicly available and auditor files accessible to “stakeholder scrutiny”.
McDonnell also said Labour would require audit firms to publish “socially useful information about their operations”.
This would include: “Offshore links, captive insurance companies, political links, audit failures, cooperation with regulators, regulator action, lawsuits, and yes, profits and practices that have been deemed unfair.”
McDonnell said a regulator would examine the sector every five years until it had reached a stage where it could deliver “a high degree of competition and choice, to deliver value for money and high quality audits to protect stakeholders over all”.
Carum Basra, corporate governance policy adviser at the Institute of Directors, said: “The audit product has suffered significant reputational damage in recent years, and Labour is correct to call for a significant response to begin rebuilding trust.
“Many of our members favour a complete split between audit and non-audit firms – and not merely an operational ring-fencing of audit and non-audit activities within the same firm.
“Stakeholders want to feel confident that a challenging and sceptical conversation has taken place between the auditor and the company.
“However, we remain to be convinced that the best approach is the establishment of a new statutory body to conduct audits.”
Ian Peters, chief executive of the chartered institute of internal auditors, said: “Whilst audit reform must be a key priority for the next government, Mr McDonnell’s proposals leave many questions unanswered and much greater detail would be required in order to determine the benefit of his proposals.
“We have written to the leaders of all the main parties urging them to make manifesto commitments to prioritise audit reform in the next parliament.”
Michael Izza, chief executive of the Institute of Chartered Accountants in England and Wales, said: “We agree the audit market needs to change, and so we’ve been engaging in reviews of the sector to call for more competition, stronger regulation, higher ethical standards and, most importantly, improved audit quality.
“Reform of audit is already underway and we want the next government to develop a package of measures to deliver meaningful change in a way that is proportionate and practical given the global environment in which the UK operates.”
A spokesperson for EY said: “We remain committed to ensuring the audit profession is able to continue to serve the evolving needs of business, investors and the public interest.”
Deloitte and PwC declined to comment and KPMG was contacted for comment.