Pressure Mounts on `Big Four' Auditors as U.K. Starts Probe

(Bloomberg) -- Pressure on the U.K.’s audit firms mounted as a competition watchdog started investigating the industry a day after another regulator said it was considering banning auditors from doing consulting work for the companies they assess.

In a move that could herald a major shake-up, the Competition and Markets Authority said it would look at concerns about statutory audits that were raised in the wake of the collapse of Carillion Plc in January. The probe increases the risk that regulators may threaten significant structural changes for the “big four” accounting firms.

That investigation will consider whether auditors have little incentive to produce “challenging performance reviews” of companies, which pick their own auditors. It’ll look at whether Deloitte, KPMG, EY and PricewaterhouseCoopers may be “too big to fail.”

“If the many critics of the audit process are right, it is not just the companies which buy audits that lose out; it is the millions of people dependent on savings, pension funds and other investments in those companies whose audits may be defective,” the CMA’s chairman, Andrew Tyrie, said in a statement on Tuesday.

‘Move Swiftly’

Business Secretary Greg Clark encouraged the CMA to “be ambitious in its thinking and move swiftly.” In a letter to Tyrie on Monday, he said he has “concerns about the operation of the market and the recent events around the collapse of Carillion” and department store BHS Group Ltd. “have brought this into sharp focus.”

It’s not the first time that antitrust regulators have looked at the market power of big audit firms. Just four years ago, authorities ruled that U.K. corporations must re-tender audits every 10 years. The EU has also threatened to split off auditors’ consulting arms in recent years, before adopting watered-down proposals.

Atul Shah, Professor of Accounting and Finance at the University of Suffolk, said he wanted the CMA probe to prompt something “very radical” such as, at a minimum, a break-up of the big four.

“The culture and behavior needs to radically change,” he said, adding that accountancy firms should refuse to take on consultancy work for companies they audited.

The CMA said a structural break-up of the big four into smaller firms could pose "significant and potentially insurmountable challenges," according to a consultation document. Splitting up the auditors would need to be introduced on "an international basis to be most effective," the regulator said.

It laid out other potential options including a market share cap on the auditors or a potential requirement for joint reviews, ensuring that two audit firms sign off on accounts.

‘Complex’

KPMG’s chairman and senior partner Bill Michael responded to the probe saying that he has “been honest that the industry faces challenges.” Stephen Griggs, head of audit at Deloitte, said it’d be "complex" to put in place "measures that encourage choice as well as a robust audit market." A PwC spokesman said the firm was “open to change and finding ways to create more choice.” EY didn’t immediately comment.

On Monday the Financial Reporting Council, Britain’s accounting regulator, said it was considering banning auditors from doing consulting work for the companies they assess. In June, the FRC said KPMG’s audit work in the U.K. was of an unacceptable standard.

The CMA plans to publish its provisional findings before Christmas, its chief executive officer, Andrea Coscelli, said in a statement. The CMA has told the government it may need legislation to put its findings into place.

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