Britain's 'Big Four' accounting firms face major overhaul

By Huw Jones

LONDON (Reuters) - Britain's "Big Four" accounting firms face a radical shake-up from proposals to reduce their hold on the market for auditing companies' books, which would also force them to separate their audit and advisory businesses.

The plans, published on Tuesday in two government-requested reports, mark the most ambitious attempt yet to reform the accounting industry, dominated by EY, Deloitte, KPMG and PwC, which check the accounts of 341 of the top 350 listed companies in Britain.

Politicians have criticised a "cosy" audit sector and its "timid" regulator of failing to foresee the collapse of retailer BHS and construction company Carillion.

In a report commissioned by the business ministry, John Kingman, chairman of insurer Legal & General, said the current regulator - the Financial Reporting Council (FRC) - should be replaced by a new watchdog with new management, stronger powers and a competition remit. It would be funded by a mandatory levy on accounting firms.

"We need to build a new house," Kingman told reporters.

The new watchdog - the Audit, Reporting and Governance Authority - would directly regulate auditors, be forward looking and draw a line under a creaky, leaky, ramshackle and "excessively consensual" FRC perceived to be too close to the Big Four, Kingman said.

The new watchdog would also have powers to pursue any company director if it found wrongdoing.

Business minister Greg Clark said the government would implement Kingman's recommendations to replace the FRC.

FRC Chief Executive Stephen Haddrill has already said he would step down next year. The board of the new regulator would decide whether to keep on current FRC staff.

FRC Chairman Win Bischoff said Kingman had set a course for a stronger, new regulator to emerge.

AUDIT MARKET REVIEW

The other report by the Competition and Markets Authority (CMA) revealed the interim findings of its audit market review, which it began a few months ago.

The CMA's report stopped short of calling for a break-up of the Big Four but proposed putting their audit and advisory services into separate operating entities.

It also proposed that companies should use two accounting firms to audit their books.

"We propose that FTSE350 audit should be carried out jointly by two firms, at least one of which should be from outside the Big Four," the CMA said.

The subsidiaries of a company would be divided up among the two auditors, with both approving the consolidated accounts.

New laws would be needed to implement the CMA proposals.

"We are supportive of change that enhances audit quality and maintains the competitive position of the UK as we prepare to leave the EU," said Deloitte senior partner David Sproul.

EY said it would support workable measures that genuinely improved audit quality to rebuild society's trust in business.

"INTRACTABLE PROBLEMS"

European Union and British reforms over the past two years to increase competition in the audit market have ended up with companies switching between the Big Four rather than hiring smaller rivals like Grant Thornton or BDO.

"These intractable problems may take some years to sort out," said CMA Chairman Andrew Tyrie. "If it turns out that the proposals are not far-reaching enough, the CMA will persist until the problems are addressed."

Kingman said a new regulator would bring an end to current industry self-regulation through professional bodies like the ICAEW. FRC oversight of actuaries should be moved to the Bank of England, he said.

Joint audits are estimated to cost about 20 percent more than having a single auditor.

The CMA said if joint audits did not work, a possible alternative would to be ensure that some major audit contracts were only available to non-Big Four accountants - a step the industry proposed in the summer.

Under the CMA's proposals for a separation of the accounting firms audit and advisory services, the audit business would have its own board, staff and profit pool for bonuses so it could focus on quality book-keeping.

Other recommendations include a "duty of alert" that requires auditors to tell the regulator if they have serious concerns about a company's viability. The CMA recommendations are open for public consultation until mid-January.

(Reporting by Huw Jones. Editing by Jane Merriman)