Raymond Doherty 18 Apr 2019 08:16am

CMA proposes radical reshaping of UK audit

The Competition and Markets Authority (CMA) has called for the Big Four to split its audit businesses and for mandatory joint audits

Caption: The end of the Big Four in the UK?

These are just two of the radical proposals in its report on the UK audit industry, which also include much tighter regulation of audit committees and a review of the changes after five years.

The CMA review was launched in October 2018 in response to a number of high-profile company failures in the past two years, most notably that of Carillion, and the questions they raised about the work of their auditors. A scathing report from the Department for Business, Energy & Industrial Strategy and Work and Pensions committees accused the Big Four of being “complicit” in Carillion’s collapse. More recently the collapse of Patisserie Valerie has led to criticism of its auditor, Grant Thornton.

Announcing the report’s findings, CMA chairman Andrew Tyrie said, “People’s livelihoods, savings and pensions all depend on the auditors’ job being done to a high standard. But too many fall short – more than a quarter of big company audits are considered sub-standard by the regulator. This cannot be allowed to continue.

“Conflicts of interest cannot be allowed to persist; nor can the UK afford to rely on only four firms to audit Britain’s biggest companies any longer. Early action will require legislation – hence the CMA’s proposals,” he added.


On the Big Four “operational” split, the CMA said it will focus only on the UK arms of EY, PwC, KPMG and Deloitte’s audit businesses “given the difficulties with an immediate global structural split”.

The separate audit businesses will have separate management, accounts and remuneration, CEO and board, and financial statements for the audit practice. It also recommends an end to profit-sharing between audit and consultancy, and “promotions and bonuses based on the quality of the audits”.

Mandatory joint audits are necessary because “barriers to entry for ‘challenger’ audit firms are currently large”, the CMA says. Challenger firms and the Big Four will be jointly liable. There will be some initial exceptions for audits of the “largest and most complex companies” and any company that chooses a “sole challenger” will be exempt but could be subject to more rigorous scrutiny.

The joint audit regime will remain until “the regulator determines that choice and competition have improved enough to address the vulnerability of the market to the loss of one of the Big Four”.

The CMA says that the new audit regulator, the proposed Audit, Reporting and Governance Authority (ARGA), should hold audit committees “more vigorously” to account.

This will include committees being made to report their decisions on hiring and supervising auditors and =the regulator issuing “public reprimands to companies whose committees fall short of adequate scrutiny of their auditors”.

After five years, the changes will be reviewed with more drastic action considered if no improvement is recorded, such as a greater separation of the Big Four and moving to independent appointment of auditors.

Since the CMA launched its review, the results of the Kingman and BEIS committee reports have arrived, while the review led by Sir Donald Brydon is ongoing.

“We look forward to supporting the government as it considers how best to take forward these changes through legislation, alongside Sir John Kingman’s recommendations on regulation and the results from Sir Donald Brydon’s review on the quality and effectiveness of audit,” said the CMA’s chief executive, Andrea Coscelli.

Michael Izza, ICAEW chief executive, said, “While we support the CMA’s focus on reinforcing the independence of auditors, we are now concerned that some of the measures they propose could prove counter-productive, pushing up costs for businesses and consumers while doing little to improve quality or increase choice. For example, we question the CMA’s confidence that mandatory joint audit with joint liability will make the market more resilient. As proposed, this looks like a very complex intervention, and there is a high risk that it could both drive out incumbents and discourage new entrants. We have long argued that a segmented market share cap would be a better and faster way of extending competition.

“The CMA’s report does contain a number of other ideas which are realistic and pragmatic, and do go to the heart of rebuilding trust in audit. These will need to integrate with the outcomes of the Kingman and Brydon reviews to deliver a comprehensive and coherent programme of reform. We look forward to working with all parties to produce effective recommendations for regulation and legislation which will ensure that audit meets the future needs of the British economy and wider society.”