It emerged last week that the Big Four accounting firms are engaging in talks with the audit regulator regarding a self-imposed break-up in an attempt to get ahead of government enforcement action.

The group of companies, including PwC, Deloitte, EY and KPMG were in talks with the Financial Reporting Council (FRC) as it drew up guidelines for the separation of audit and consulting operations within the firms.

However, a spokeswoman for the Competition and Markets Authority, said: “Change is now vital in the audit industry. Legislation is needed so that the regulator has the power to design and enforce an effective split between audit and consultancy. The industry’s proposals should be judged against the criteria we set out in our report, including an end to cross-subsidies and profit-sharing.”

In April 2019, the Competition and Markets Authority (CMA) called for a break-up of the Big Four in as part of a review of the audit sector. Many firms opposed the notion, including EY, which said that it “fundamentally disagreed” with a break-up of its business.

Similarly, the CMA has warned the accountancy profession that it is observing its proposals to inject competition into the industry.

The authority said it would assess proposals drawn up by the accountancy regulator to reform the auditing of companies. The FRC announced that it wants a system of “managed shared audits” where one of the big four audit firms works alongside a “challenger” company.

Sky News reported that under the new FRC proposals, most FTSE 350 companies would include a challenger firm when releasing their audit out to tender. If a Big Four company was selected, it must hand out work worth around a third of the audit fees to a smaller rival, with the larger firm taking sole responsibility for the process.

The Times reported that the system appears to be a looser arrangement than that suggested by the CMA, which called for “mandatory joint audits” where challenger companies would work alongside big four firms and be held jointly accountable for the results.

The CMA said: “We will judge the solution adopted by one overriding test: does it enable the smaller firms to gain experience of auditing large companies, and eventually challenge the dominance of the Big Four — increasing choice? If not, the CMA will revisit the question along with our review of the operational split, as stated in our final report into the sector.”