The UK’s big four auditors will next week face an unprecedented move to limit their market share and allow smaller rivals to gatecrash their self-confessed oligopoly as regulators shake up a sector rattled by a string of corporate collapses.
Sky News has learnt that the Competition and Markets Authority (CMA) is preparing to recommend a series of remedies to bolster competition in the audit sector following a two-month market study, but that it will stop short of demanding a full-break-up of the dominant quartet: Deloitte, EY, KPMG and PricewaterhouseCoopers (PwC).
Although they have yet to be formally briefed on the CMA’s conclusions, senior figures in the profession have learned in recent days about its main recommendations, which nonetheless remain subject to change ahead of an announcement early next week.
The review was launched at the behest of the Department for Business, Energy and Industrial Strategy (BEIS) in the wake of anger about the role of auditors in major corporate scandals at BHS and Carillion.
Accountants have also faced probes into their work on the books of companies such as BT Group, the Co-operative Bank, Ted Baker and Patisserie Holdings.
One audit sector source said the imposition of a cap on the number of large listed companies that the big four can audit, the adoption of a joint audit model for large listed companies and new steps to improve the accountability of companies’ boardroom audit committees – including giving regulators jurisdiction over them – were all expected to form part of the CMA’s proposals.
An adviser to one big four firm said on Thursday that the CMA may yet leave open the fallback option of a wholesale break-up, which has been lobbied fiercely against by the sector’s biggest players.
However, they added that the regulator appeared to have been convinced by the industry’s argument that a full structural split between audit and non-audit businesses would be impractical on a UK-only basis.
The big four operate on a global basis, and most of the FTSE-350 companies whose accounts they oversee are multinational in nature.
Instead, the CMA is likely to recommend a less radical separation that would leave the firms intact but could nevertheless lead to the creation of separate boards of directors for the audit practices of the major accountancy firms.
This could be presented as a form of ‘ring-fencing’ that the CMA’s chairman, Lord Tyrie, was instrumental in pushing through in Britain’s banking industry following the 2008 financial crisis.
The CMA’s findings were submitted to the government in recent days, with their implementation a matter for ministers to decide on.
Although the inquiry will stop short of the most draconian reforms, they would, if adopted, have significant implications for the audit profession’s leading quartet.
The adoption of joint or shared audits, a system used widely in France, would mean a firm from outside the big four being required to work alongside one of the quartet on the accounts of large companies.
It was unclear this weekend at what level any market share cap on the big four firms might be set, and whether it would be framed as an individual or collective limit on the number of FTSE-100 companies they can audit.
The initial conclusions of the CMA market study will appear alongside those of an inquiry by Sir John Kingman, the former Treasury mandarin, into the role and remit of the under-fire Financial Reporting Council (FRC).
Sources said that Sir John’s work had concluded that the audit regulator should be reconfigured as a statutory body holding stronger powers, potentially including a formal mandate to ensure the sector’s competitiveness.
His report, which was also ordered by Greg Clark, the Business Secretary, is thought likely to bring companies, as well as auditors and qualified accountants, under the FRC’s supervisory scrutiny, making it more straightforward to pursue enforcement action in the event of misconduct.
A person close to Sir John said he had concluded that the FRC was “not fit for purpose” and required a radical overhaul of its role, remit and leadership.
Sir John and a supporting panel of industry figures are also said to have decided that supervision of actuaries should in future be overseen by the Prudential Regulation Authority rather than the FRC.
In the announcement of the CMA’s review of the audit market, Lord Tyrie said: “If the many critics of the audit process are right, it is not just the companies which buy audits that lose out; it is the millions of people dependent on savings, pension funds and other investments in those companies whose audits may be defective.”
Closer scrutiny of the audit sector has already prompted Deloitte and KPMG to say that they will cease undertaking non-audit work for the FTSE-350 companies whose accounts they supervise.
As the auditor to Carillion, KPMG is facing scrutiny for its oversight of the construction giant, which went bust in January with debts of more than £5bn.
KPMG, whose chairman, Bill Michael, described the sector as “an oligopoly” earlier this year, earned roughly £1.5m annually as Carillion’s auditor, with significant sums earned in addition from non-audit work.
At the retailer BHS, PwC was found by the FRC to have failed to conduct sufficient oversight of its accounts at a time when it was earning significant sums from non-audit work.
The FRC said recently that it was engaged in a separate piece of work that would decide “whether further actions are needed to prevent auditor independence being compromised, including whether all consulting work for bodies they audit should be banned”.
The big four have already braced themselves for substantial structural change, with executives preparing for formal ring-fencing between audit and non-audit services as a potential outcome from the CMA probe.
The provisional findings of the reviews will come as Stephen Haddrill, the FRC’s chief executive, prepares to step down next year.
A CMA spokesperson said: “Our investigation is ongoing. Any reporting ahead of the publication of our provisional findings is speculation.”
The FRC and BEIS did not respond to requests for comment, while none of the big four firms contacted by Sky News would comment.