The big four accounting firms would be forced to break up their UK businesses and drop a huge number of their most prized audit clients under proposals floated by Labour on Friday.
A report commissioned by the party has recommended radical measures to clean up Britain’s scandal-hit accounting industry, including capping the Big Four’s share of the audit market at 50 per cent of Britain’s largest listed companies.
This would have a dramatic impact on the Big Four — Deloitte, EY, KPMG and PwC — because they audit all but 10 companies in the FTSE 350 index.
The big accounting firms should be broken up by separating audit from other services, according to the report led by Prem Sikka, professor of accounting at Sheffield university, which was commissioned by shadow chancellor John McDonnell.
The report proposed a new, state-backed body to audit the accounts of banks and other financial institutions.
It also recommended an independent body to appoint and remunerate auditors for large groups outside of finance, to help eradicate cosy ties between company directors and their accountants.
Critics of the Big Four are increasingly concerned they have too great a stranglehold, leading to low-quality reviews of company accounts as well as conflicts because the firms offer both audit and consulting work to clients.
“A lack of openness, transparency and accountability [in the accounting industry] means nobody ever seems to be punished for their transgressions,” said Mr McDonnell. He has previously described the Big Four as a “cartel”.
Mr Sikka’s report comes amid growing public anger about the collapse of companies including Carillion and BHS, prompting questions about the quality of their auditors and the adequacy of the regulatory system.
The report said partners at accounting firms responsible for audits would become personally liable for any failures related to their work.
It also recommended it become a criminal offence for auditors of large companies to offer consulting services of any kind to these clients.
“Auditors have been unable to deliver independent and robust audits and the auditing industry is in disarray, dysfunctional and stumbles from one crisis to another,” said the report. “Auditing firms are mired in conflict of interests and have shown willingness to bend the rules at almost any cost to increase their profits.”
The report by Mr Sikka was highly critical of the Financial Reporting Council, the regulator accused of being too close to the industry.
“The soft-touch regulation of the FRC has done little to wean firms away from intoxication with private profits from the sale of non-auditing services to audit clients,” said the report.
Mr Sikka’s report also recommended that large companies should be required to change their auditor every five years, a much stricter regime than the EU framework.
The report is being published days before John Kingman, chair of Legal & General, is expected to release his review of the FRC, which was commissioned by the government.
Industry insiders believe Sir John is unlikely to call for the regulator to be disbanded, although a management overhaul and a strengthening of its powers are likely.
Mr Sikka’s report will also intensify pressure on the and Markets Authority, which is expected to publish its own findings on how to resolve competition problems in the audit market next week.
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