UK watchdog drops hammer on big 4 accounting firms

The Competition and Markets Authority (CMA) has revealed serious competition concerns in the accounting industry and proposed significant legal changes to improve the audit sector.

CMA said this week, it has identified a number of reasons why it believes audit quality is falling short in the UK, amid rising public anger about the dominance of the big four accounting firms.

The watchdog recognised that the choice of auditors is too limited, with Deloitte, EY, KPMG and PwC conducting 97 per cent of the audits of the biggest companies.

Moreover, it found that auditors’ focus on quality appears diluted by the fact that at least 75 per cent of the revenue of the big four comes from other services like consulting.

In order to address these concerns, CMA is proposing legislation to separate audit from consulting services, introduce measures to substantially increase the accountability of those chairing audit committees, and impose a rule under which the audits of the UK’s biggest companies have to be carried out by at least two firms.

The proposals are a part of the CMA’s market study, commissioned by the government to explore if the market is working as well as it should.

“Addressing the deep-seated problems in the audit market is now long overdue,” CMA chair Andrew Tyrie said.

“These intractable problems may take some years to sort out. If it turns out that the proposals are not far-reaching enough, the CMA will persist until the problems are addressed,” Mr Tyrie noted.

CMA chief executive Andrea Coscelli also commented: “We have moved fast to come up with a comprehensive package of proposals for legislation, which we will now consult on”.

The findings of a separate government-commissioned review into the Financial Reporting Council, led by Sir John Kingman - the Legal & General chair, has called on the government to disband the FRC and form a more powerful watchdog.

The industry faces further assessments with the government announcing on Tuesday a review of the purpose and scope of the audit more widely.

Mr Coscelli agrees with shining a light on the industry.

“Successful reform of the audit market will require legislation, in combination with planned improvements to regulation as recommended by Sir John Kingman,” he concluded.