Jessica Fino 16 Mar 2018 10:56am

FRC wants inquiry into breaking-up Big Four

The Financial Reporting Council (FRC) has called for an inquiry into the case for breaking up the Big Four accountancy firms into separate parts
Caption: Will the Big Four be dismantled?

FRC chief executive Stephen Haddrill said that the Competition and Markets Authority (CMA) should look into possibility of “audit only” firms in a bid to enhance competition in the sector, according to the Financial Times.

“There is a loss of confidence in audit and I think that the industry needs to address that urgently. In some circles, there is a crisis of confidence,” he said.

He wrote to the CMA following heavy criticism of the Big Four and the large fees they received from collapsed construction group Carillion. Both the FRC and the firms were hauled in front of MPs to explain their roles. The FRC was described by the joint committee investigating Carillion as “useless”, while the firms were accused of “feasting on the carcass” of the failing business.

According to the FT, Haddrill has held three meetings with the CMA and further talks are scheduled. “The Competition Commission introduced some remedies to try and encourage more competition. But there is no more competition. So it seems to me that we ought to have another look at [the audit market],” he said.

A CMA spokesperson said, “We are working closely with the FRC, whose role it is to regulate the quality of UK company audits, to see what more needs to be done to drive up standards. As part of this, we are actively monitoring the impact of the remedies put in place following the Competition Commission’s inquiry. The CMA remains open to looking further at the audit sector itself and will work with the FRC in support of any action it chooses to take.”

The Big Four audit 97% of FTSE 350 companies. At the time of the latest Competition Commission investigation in 2012/13 this figure was 95%, meaning competition has reduced rather than increased.

An FRC spokesperson said it was hard for non-Big Four firms to win larger company audits, not least because of the cost of putting in bids for audits they are most likely not to win.

“However with retendering (at 10 years) and forced rotation (at 20 years) it could mean competition for a replacement auditor involves only three of the remaining Big Four firms and in some cases fewer than this where one firm has less expertise in a particular sector,” they added.

“Public confidence in audit is low, public understanding of what audit does is low. So it is undoubtedly time for a CMA review.”

The FRC’s suggestion means that the firms could be forced to break their audit arms into separate businesses.

In response, ICAEW chief executive Michael Izza, said, “Audit only firms have been considered before, but there has not been enough demand from the market to cause one to be set up. This does not mean they cannot be re-considered as an option for the future.”

Liberal Democrats leader Sir Vince Cable last month called for a fresh investigation into the Big Four following the collapse of Carillion.

Sir Vincent had previously suggested that the firms’ current business model – with consulting arms as an integral part – generated potential conflicts of interest “when an accountant might overlook the odd problem so as to not annoy a client that pays them well for other work”.

Cabinet minister David Lidington previously stated that there was not enough “compelling evidence” to dismantle the Big Four.