The UK’s Big Four accounting firms have refused to back a government plan to break their dominance of the audit market by forcing them to share work with smaller competitors.
In response to a public consultation that closed last month, Deloitte, EY and PwC said they did not support the government’s proposal for “managed shared audits” of large listed companies.
The other Big Four firm, KPMG, questioned how shared audits could be made to work.
Deloitte and EY said capping the number of FTSE company audits any one firm could carry out would be a better solution. BDO, the biggest challenger to the top firms, had already confirmed it would prefer a cap.
The Big Four firms currently audit the entire FTSE 100 and more than 90 per cent of the FTSE 250, raising concerns about a lack of competition and that they have become “too big to fail”.
They have been criticised for the quality of their work and for signing off on the accounts of companies shortly before they collapsed, including Carillion and Thomas Cook.
The shared audit plan aims to help smaller firms build up their capacity and so they can compete. It is part of sweeping proposals to overhaul the audit market and UK corporate governance and would require FTSE 350 companies to appoint a smaller accounting firm to carry out a “meaningful proportion” of their audits.
Accounting firms said they broadly supported the proposals, which were published by the business department in March, including the government’s aim to widen the choice of auditors.
However, Deloitte, EY and PwC all oppose shared audits, according to summaries of their responses to the consultation. KPMG said last month it had seen no evidence that the measure would improve audit quality.
Shared audits could also lead to duplication of work and increased costs for businesses, said Michelle Hinchliffe, KPMG’s UK chair of audit. “However, we have previously offered to participate in a pilot and remain committed to help find solutions to these challenges,” she said.
In a letter to the business department, Deloitte UK managing partner Stephen Griggs said his firm believed shared audits would create practical difficulties and deter companies from listing in the UK.
Deloitte also raised concerns that not enough smaller audit firms would be willing to take part.
Three years ago, the industry discussed limiting the Big Four to auditing 80 per cent of the FTSE 350 but the idea never took off. Three of the five largest firms — EY, Deloitte and BDO — have now said they would prefer a cap.
However, PwC, which has more FTSE 350 clients than any other audit firm, told the FT that neither shared audits nor a cap would improve quality. KPMG is concerned about how a cap would work, said a person briefed on the matter.
“We’re up for change but I think it’s got to be change we can identify as a quality improvement,” Kevin Ellis, chair and senior partner of PwC UK, told the FT. “I’m not sure that the corporates in the UK that we audit, particularly the international ones, will want a different set of rules here.”
The business department said shared audits would allow smaller firms to win more business without being exposed to legal liability for the entire audit of a large company.
Most accounting firms outside the Big Four do not have the capacity or expertise to take on the largest audits in the FTSE 350 and a market cap would not fix this, said a person briefed on the department’s position.
The department has not said when it will publish its response to the hundreds of submissions to its consultation on the proposed reforms.
Sourced from FT.com