A UK financial regulator has called for an inquiry into whether the big four accounting firms should be broken up to end their dominance in auditing the accounts of Britain's biggest listed companies.
Stephen Haddrill, CEO of the Financial Reporting Council, which regulates accountants, said Britain's Competition and Markets Authority should investigate the case for "audit-only" firms to bolster competition and stamp out conflicts of interest.
It would force the big four firms - Deloitte, EY, KPMG and PwC - to spin off their UK audit arms into separate businesses.
Haddrill's intervention follows a string of corporate accounting scandals, ranging from Carillion in Britain to Steinhoff in South Africa and Petrobras in Brazil.
"There is a loss of confidence in audit and I think that the industry needs to address that urgently," he said.
Haddrill has discussed investigating the UK audit market with the Competition and Markets Authority.
He said the Financial Reporting Council was initially opposed to the idea of "audit-only" firms when Michel Barnier, then the EU commissioner responsible for the internal market, broached the idea in 2011.
But the failure of subsequent UK and EU reforms to reduce the stranglehold of the big four over the audit market meant the idea of audit-only firms "needs to be reconsidered", Haddrill said.
Deloitte, EY, KPMG and PwC audited all but nine of the UK's 350 largest listed companies at the end of their latest financial years, according to Manifest, a research firm that advises investors.
Their market share has grown in recent years in spite of an investigation by the UK Competition Commission - the predecessor to the Competition and Markets Authority - that resulted in a stricter regime.
This included a requirement that FTSE 350 companies put their audits to tender at least every 10 years. In 2016, the EU introduced rules that obliged listed companies to change their auditors every 20 years.
Haddrill said: "The Competition Commission introduced some remedies to try and encourage more competition. But there is no more competition. So it seems that we ought to have another look at [the audit market]."
The Competition and Markets Authority said: "We are actively monitoring the remedies put in place following the Competition Commission's inquiry."
Haddrill's concerns have intensified in the light of the rapid growth of the big four firms' consulting arms.
Critics of the big four fear a firm's audit work could be compromised if it secures large additional fees from the same client by doing consulting work. A broader concern is that firms are too focused on consulting, and not enough on audit.
Haddrill said: "If you're in the senior leadership of the firm, I think you need to be focusing heavily on your public interest responsibility, which is the audit bit. [But] so much of your attention is bound to be drawn to the most profitable and the fastest-growing part of your business, which is not the public interest part."
341
The number of the UK's 350 largest listed companies that Deloitte, EY, KPMG and PWC audited at the end of their latest financial years
Other potential reforms put forward by Haddrill included a "ring-fencing" of accounting firms' audit arms. He also flagged the case for a cap on the number of listed clients each firm is permitted to audit.
Political pressure is building on the Financial Reporting Council to take a tougher stance with audit firms after Carillion - once one of the UK's largest construction companies - collapsed in January.
KPMG signed off on Carillion's 2016 accounts in March last year, four months before the company issued the first of three profit warnings.
Last month, MPs on two influential Commons select committees questioned the judgment shown by KPMG and Deloitte as Carillion's external and internal auditors.
Frank Field, Labour chairman of the work and pensions committee, described the big four firms as a "cosy carousel".
"It's time for some proper competitive pressure," he said.
Several influential investors also support a new investigation into the audit market.
Natasha Landell-Mills, head of stewardship at Sarasin & Partners, an investment house, said: "We would certainly welcome an examination by the [Competition and Markets Authority] of how audit quality is impacted by non-audit work."
Euan Stirling, head of stewardship at Aberdeen Standard Investments, said: "We are increasingly concerned about a lack of competition available to companies when they look to procure audit services."
Michelle Hinchliffe, the head of audit at KPMG in the UK, said the firm could "see the need to re-evaluate our business models".
However, she added that KPMG believed "multidisciplinary firms deliver more benefits for investors and society".
Deloitte said it believed a multidisciplinary business model was the best to ensure "high quality audits".
Kevin Ellis, chairman of PwC UK, said: "We'd welcome more players in the large-company audit market to boost choice and are open to ideas about how to achieve this."
The Financial Times
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