UK Watchdog Calls for Audit Market Makeover

The accounting firm with the best work-life balance. And why the Big Four aren’t even close

The accounting firm with the best work-life balance. And why the Big Four aren’t even close

The CMA's recommendations include: the separation of audit from consulting services, mandatory "joint audit" to enable firms outside the Big Four to develop the capacity needed to review the U.K.'s largest companies, and the introduction of statutory regulatory powers to increase the accountability of companies' audit committees.

The logo of PricewaterhouseCoopers is seen on the local offices building of the company in Luxembourg, April 26, 2016. "However, we are concerned that some of their headline recommendations don't meet the objectives on increased choice and competition and that our warnings on unintended consequences such as lower audit quality, damage to United Kingdom competitiveness, and weaker resilience of the sector have been ignored." . PwC was fined a record 6.5 million pounds ($9 million) for its shortcomings.

Acknowledging that enforcing an immediate split of globe-spanning groups would be "difficult", the CMA recommended just an operational split of United Kingdom audit work for now, requiring separate management, accounts and remuneration and a separate CEO and board for the audit arm and an end to profit-sharing between audit and consultancy, holding back the potential for a full break-up if there is not felt to be an improvement in five years' time.

Rachel Reeves, chair of parliament's business committee which called for a full break-up, backed the CMA's measures saying it was now up to the government to legislate.

The CMA's proposal follows recommendations by the House of Commons Business, Energy and Industrial Strategy Committee which earlier this month said the CMA should consider separating the two arms.

He said the proposals "may make for good headlines, but they are poorly focused" and added that there was "no evidence that they will lead to genuinely enhanced audits".

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However, the CMA hasn't included this in its final recommendations. The firms, EY, Deloitte, KPMG and PwC, would be required to maintain separate management, accounts and remuneration: have a separate chief executive and board for the audit arm; report separate financial statements for the audit practice; and end profit-sharing between audit and consultancy, and promotions and bonuses based on the quality of the audits. "They represent a missed opportunity to create lasting change and make the United Kingdom the best and safest place to invest and work". Both would be liable for the audit.

The proposed overhaul of the UK's accountancy industry is meant to improve both competition and selection prospects within the sector, in the wake of the "Big Four" firms coming under increasing fire.

They also take account of the recommendations of a major report from the Business Select Committee, and the inquiry into regulation led by Sir John Kingman.

The big four firms check the books of nearly all of top 350 listed companies in the UK.

Checking the books of big, global companies with subsidiaries across the world has always been the preserve of the Big Four given the need for a cross-border network of partners and big spending on IT.

But in a report released on Thursday, the Competition and Markets Authority recommended only "an operational split between the audit and non-audit practices of the biggest firms in the U.K".

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