MPs have called for a ‘full structural break-up’ of the ‘Big Four’ accountancy firms following the collapse of Carillion, in a new report.
The Business, Energy and Industrial Strategy (BEIS) Committee said it supported the CMA’s proposed operational split between audit and non-audit operations but advocated going even further with a structural break-up of the companies – EY, PwC, KPMG and Deloitte. It argued that the move would prove more effective in tackling conflicts of interest and delivering high-quality audits.
The report noted that 27% of audits reviewed for 2017/18 did not meet Financial Reporting Council (FRC) quality standards.
It called for a range of improvements to the audit process and has encouraged Sir Donald Brydon, who is leading an independent review of the audit sector, to look into how to make audits more “forward-looking”.
The report suggested that audits move to include graduated findings, providing more nuanced information to investors and others. It also suggested that audits could provide a better picture of a company’s overall corporate governance, including assessments on areas such as pay policy, the gender pay gap, payment practices to suppliers, and on environmental sustainability.
And it highlighted the reporting and audit failures that brought down Carillion, including the “imprudent” payment of dividends out of “optimistically booked, and, in hindsight, unrealised, profits” – and called for a tightening of the UK dividend regime and action from the FRC to produce a clearer and more prudent definition of realised profits.
Rachel Reeves, chair of the Business, Energy and Industrial Strategy Committee said: “The ‘Big Four’s’ dominance has fostered a precarious market which shuts out challengers and delivers audits which investors and the public cannot rely on.
“Our report proposes a range of measures to boost competition, improve the audit product, and ensure that the UK continues to be a world leader in corporate governance. A segmented market-cap and the piloting of joint audits would help to break the stranglehold of the Big Four and deliver a healthier and more resilient audit market.
“For the big firms, audits seem too often to be the route to milking the cash-cow of consultancy business. The client relationship, and the conflicts of interest which abound, undermine the professional scepticism needed to deliver reliable, high-quality audits. Splitting audit from non-audit business would be a big step to boosting the culture of challenge needed to deliver high-quality audits.”
