U.K. Watchdog Calls for Audit Market Shakeup

A U.K. regulator has found “deep-seated problems” in the country’s audit market due to domination by the Big 4 firms, and has recommended “an operational split between the audit and non-audit practices of the biggest firms in the U.K.”

According to CFO.com, PwC, KMPG, Deloitte and EY sign off on the accounts of 97% of the U.K.’s 350 largest listed companies.

The accounting industry has been under fire in the wake of corporate collapses such as those of building contractor Carillion Plc and bakery chain Patisserie Valerie Holdings Ltd.

A parliamentary committee has called for a “full structural breakup” of the Big 4, saying that it would be more effective than other options. On April 17, though, the Competition and Markets Authority (CMA) recommended the audit/non-audit split.

“The case [for a full separation] made by the Select Committee is strong, given the shortcomings of the current market,” the CMA said. But it also noted that the Big 4 “are global firms carrying out global audits. Such a separation would have to be carried out internationally in order to be fully effective.”

Among the problems identified by the watchdog are companies selecting their auditors, the high concentration among the Big 4, and audits being carried out by firms whose main business is not audit. Reuters called the CMA recommendations “the most radical reform of auditing yet.”

The CMA says, “Auditors should focus exclusively on producing the most challenging and objective audits, rather than being influenced by their much larger consultancy businesses.”

CFO.com reports that the CMA believes creating a separate status for audit practices “will increase the focus on audit quality, with a reduction in the distracting interest in non-audit work,” and “create transparency around audit practice.”

EY reacted by disagreeing with the concept of a split. “It appears ill-timed for the CMA to restrict the skills needed to deliver high quality audit now and in the future,” the firm said.

According to Bloomberg, government officials say the CMA’s finding provided a “strong evidence base, which we will consider carefully.” It will “bring forward reforms to ensure UK remains a place offering the highest standards in audit,” business minister Greg Clark said in a statement.