UK lawmakers want Big Four accounting firms broken up

Carillion

02/04/2019 24:01

* Lawmakers go harder than watchdog on business separation
    * Cautious on joint audits, want pilot first
    * Lawmakers back Big Four proposal for temporary market caps

    By Huw Jones
    LONDON, April 2 (Reuters) - Britain's "Big Four" accounting
firms should be broken up to improve standards and transparency
in book-keeping after audit failures at construction company
Carillion  CLLN.L  and retailer BHS, British lawmakers said on
Tuesday.
    Parliament's business committee urged Britain's Competition
and Markets Authority (CMA) to force EY, KPMG, Deloitte and PwC
to legally separate audit and consultancy services.
    The CMA published interim proposals last December to require
a less draconian operational separation of auditing and more
lucrative consultancy to avoid the former being cross-subsidised
and prioritised by the latter.  urn:newsml:reuters.com:*:nL8N1YN2QR
    The CMA has yet to publish final recommendations.
    The report seeks to keep up reform momentum after past
attempts to end the so-called Big Four's dominance of
book-keeping made little headway.
    EY, KPMG, Deloitte and PwC have sought to head off being
split up by voluntarily agreeing not to offer consultancy
services to audit clients.
    The cross-party report said that if the CMA opts for only
operational separation, it should be reviewed after three years
to see if it ends cross-subsidies and improved audit quality.
    "If not, we recommend that the CMA then move to implement a
full structural break-up of the Big Four into audit and
non-audit businesses in the UK," the report said.
    Deloitte said a structural split would harm audit quality,
and could materially damage Britain's competitive position as a
leading capital market. The "Big Four" are global but the
reforms could only apply in Britain.
    They check the books of nearly all large listed companies,
employing thousands more partners than their nearest rivals like
Grant Thornton and BDO.
    
    MARKET CAP
    The CMA proposed joint audits for all of Britain's top 350
listed companies, meaning a smaller accounting firm would have
to be hired alongside any appointment of a "Big Four" firm.
    But the lawmaker report takes a more cautious approach by
recommending a pilot of joint audits in the "upper reaches" of
the top 100 companies, but supplemented with a "segmented"
market cap on the Big Four for the rest of the top 350
companies.
    The CMA kept market caps in reserve despite proposals last
year from the top four accounting firms to help challengers get
the experience to audit bigger customers.
    The government should also examine if special safeguards are
needed for auditing banks, the report said.
    It also looks at "imprudent" dividends paid by companies
like Carillion from profits that were either optimistically
booked or unrealised.
    The government and the Financial Reporting Council, which
polices accountants, should urgently produce a prudent
definition for realised profits and tighten the UK dividend
regime, the report said.
    Auditors should also play a key role in spotting fraud, it
added. A separate, independent review recommended last December
replacing the FRC with a more powerful body.
    The government is expected to propose legislation to
implement the audit shake up once the CMA has published its
final recommendations in coming weeks.
    
    

 (Reporting by Huw Jones; editing by Emelia Sithole-Matarise)
 ((huw.jones@thomsonreuters.com; +44 207 542 3326; Reuters
Messaging: huw.jones.thomsonreuters.com@reuters.net))