UK Government to break up the dominance of the Big Four audit firms

The UK Government has unveiled proposals to reduce the dominance of the Big Four audit firms and scrap the industry regulator Financial Reporting Council (FRC).

The business of auditing companies' accounts, and ensuring they are a fair reflection of their financial health, is dominated by four firms: KPMG, Deloitte, PwC and EY.

The aim is to improve regulatory standards after big corporate failures like Carillion and BHS.

To ensure much more accuracy in accounts directors of companies will have more responsibility or face tougher penalties. The changes would help restore business confidence. A 16-week consultation on the proposals is on the agenda from the middle of March.

There is concern that providing both accountancy and auditing services creates a conflict of interest. We can refer to Sec-144 of Companies Act, 2013 wherein the services which an auditor cannot render has been detailed.

Large companies will now have to use smaller audit firms for their annual audit to dilute the Big Four's dominance.

KPMG, Deloitte, PwC and EY will have to make their audits more rigorous.

They can face a cap on the number of companies they will audit, through FTSE 350 index, if improvements aren’t far reaching.

Almost a third of audits inspected on the FTSE 350 last year were in need of improvement.

The largest private companies in the UK would now face greater scrutiny from the regulators.

The collapse of construction giant Carillion is an example and a consequence of the failure in the audit profession.

The new proposals would help restore trust; similar measures had worked in the US.

The information on which people make their decisions is accurate and honest, and an auditor's role is to ensure that information is truthful.

People want to know three things about a business - how is it performing, is it honestly run, and will it survive. And auditors are the key to answering all three.

It is clear from large-scale collapses like Thomas Cook, Carillion and BHS that Britain's audit profession needs to be modernised with sensible, proportionate reforms.

A new accountancy regulator, Audit, Reporting and Governance Authority (ARGA), will implement the changes and replace Financial Reporting Council (FRC). It will have legal powers to force auditors and companies to resubmit their accounts without court action.

UK companies and directors will face curbs on dividend and bonus payments if there is misconduct, inaccurate accounts, or insufficient cash reserves. Bonus paid to directors of failed firms will be clawed back up to two years to clamp down on rewards for failure.

By providing more transparency over company accounts this will discourage firms facing insolvency from making large scale dividend and bonus payments. They will also be required to produce resilience statements.

Accountancy firms welcomed the proposals. The proposals also won the support of employers' groups.

Conclusion

There are a lot of takeaways and lessons to be learnt from the above and what the British Government is doing for improvisation of the audit profession in the UK vis-à-vis the Big Four.  

Can we, the Chartered Accountants in practice in India, along with our regulators viz, ICAI and NFRA, take ourselves forward a decade ahead is the million dollar question.