Big Four turn to the law to thwart audit industry reform
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The Competition and Markets Authority’s (CMA) recent intervention following an outcry over conflicts of interest in the wake of a string of scandals involving Deloitte, EY, PwC and KPMG may be challenged in the courts by the so-called ‘Big Four’ accountancy firms, according to reports.
Citing a “senior accounting source” The Times newspaper has reported that some of the big accountancy firms are considering seeking a judicial review of the competition watchdog’s recommendations for overhauling the industry.
After the scandals at major UK employers such as BHS and Carillion, the CMA stopped short of calling for the Big Four accountancy firms to be broken up as many had called for, and instead ordered for auditing and consultancy services to be kept separate in a move known as ‘operational separation’.
This would mean audit chiefs at do not get a share of profits from consulting and must answer to their own distinct board.
Despite criticism of the CMA for watering down its reforms in the face of industry pressure, several of the big four are understood to still not be satisfied and are taking advice from law firms on whether they could challenge the CMA’s final report on auditing, which was handed to ministers this month and to which the government has three months to respond.
As well as ‘operational separation’ the CMA is also pushing to enforce joint audits on FTSE 350 companies and has recommended tighter regulation of companies’ audit committees.
Following the recommendations made in the CMA’s report earlier this month critics slammed the regulator for missing ‘a golden opportunity’ to reform the industry, a climb down that they said comes in the face of heavy lobbying by the multi-nationals.
Prem Sikka, an accountancy professor at the University of Sheffield, said: “The CMA’s report has been incredibly diluted and it is disappointing.
“This was a golden opportunity and the CMA had good intentions, but it’s really caved in to lobbying by the Big Four and their corporate lawyers, and to political pressure.”
The market share of the big four, which audit 97 per cent of the FTSE 350, is in the spotlight after a series of blow-ups and fines.
Rachel Reeves, Labour chairwoman of the Commons business committee, has called the market “broken”.
A review last year by the Legal & General chairman, Sir John Kingman, recommended replacing the industry regulator, the Financial Reporting Council. Sir Donald Brydon, the London Stock Exchange chairman, is also conducting an independent review of auditing for the government.
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