The accountancy firm BDO is developing detailed plans to split its UK audit and non-audit businesses into separate subsidiaries after MPs called for a break-up of the larger Big Four firms.
BDO, which is the UK’s fifth-largest accountant, said its scenario planning had “swung into motion” last week after a select committee urged the competition regulator to seek a full-scale break-up of KPMG, EY, PwC and Deloitte.
“If [a split] is the right thing to do then we should definitely do it, and if the Big Four go down that path, it will become the market norm and we can’t help but be impacted,” said Scott Knight, head of audit at BDO.
BDO’s plans would create an audit subsidiary with about 2,000 staff and a non-audit unit with about 3,000 staff, dominated by tax practitioners. Both would continue to operate under the umbrella of a single UK parent company. The plans were first reported by the Sunday Telegraph.
The audit division would be legally ringfenced and would “demonstrate that it is sustainably profitable and not being subsidised by other parts of the firm, and have levels of governance to ensure that it is run by auditors, protecting the audit culture,” Mr Knight said.
The Competition and Markets Authority is due to publish final proposals on the audit market in the coming weeks after a string of serious failures — such as Carillion and Patisserie Valerie — shone a spotlight on the sector, including on lucrative consulting deals with firms that are also audit clients.
In December the CMA proposed an “operational” break-up of the Big Four, which would force them to put into place a legal separation between their audit staff and the rest of their businesses. But the House of Commons business, energy and industrial strategy committee this week backed a more extreme, full-scale split.
Mr Knight said that a split would take BDO a year or two to implement, but that similar break-ups at Big Four firms would take “more than five years” as they deal with the “divorce bill”, pension funds and settlements between groups of partners.
He added that a legal separation between audit and consultancy divisions would be “incredibly difficult to enforce” for large auditors working with big corporates.
“If you have the audit of one of the largest companies, BP for example, only a small proportion of the audit will be done in the UK by a standalone audit firm — the rest is performed internationally and the rest of the world won’t be expected to follow the UK’s lead.
“But I do think the concerns raised around subsidisation and cultural influence are really big concerns that the public has, and the accounting firms need to address these rather than say it’s not an issue,” Mr Knight said.
All of the Big Four auditors, plus Grant Thornton and BDO, said last year they were planning for a potential forced break-up as scrutiny escalated following the collapse of the outsourcing group Carillion, where audited accounts a year before its liquidation with £1.5bn of debt offered little indication of the size of its problems.
Audits of BHS, which collapsed in 2016, and Patisserie Valerie, which fell into administration this year after revealing a widespread accounting fraud, have also been heavily criticised.
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