The Big Four audit firms have refused to back a U.K. government plan to break their dominance of the market by forcing them to share work with smaller competitors to give them a foothold.
In response to a public consultation on audit reform that closed last month, Deloitte, EY, and PwC said they did not support the government’s proposal for “managed shared audits” of large-listed companies.
KPMG, meanwhile, questioned how shared audits could improve audit quality or be made to work in practice, as work could be duplicated (or missed) while costs increased.
Challenger audit firms have also questioned audit sharing, especially over fears they could be blamed and held liable for failings.
Deloitte and EY have said they would prefer an “audit cap,” whereby there is a limit to how many FTSE companies each firm can audit.
The Big Four currently audit the entire FTSE 100 and more than 90 percent of the FTSE 250. Despite concerns about the lack of choice and efforts to widen the market, large U.K.-listed companies have been reluctant to use challenger firms, often over fears they do not have the necessary in-house expertise to serve their needs.
Experts suggest the firms’ reluctance to back the government’s plans could torpedo another attempt at meaningful reform.
Franki Hackett, head of audit and ethics at AI-driven audit technology company Engine B, says, “Allowing the Big Four to set the terms of changes which aim to challenge their dominance of the audit market is like putting the foxes in charge of the henhouse. Yet, it’s clear tinkering around the edges on competition isn’t going to be enough.
“Instead, we need to address the root causes of audit failure: a lack of modernization; audit firms overwhelmed by evidence from increasingly complex businesses; and audit models that try to solve the problem just by throwing more people at it.”
Hackett says “real change” will only come when external audit becomes more technology-driven and data-enabled, so that firms “won’t have to pay expensive staff to perform routine, laborious data reconciliation tasks.”
“Without this, the effective oligopoly at the top of audit will only worsen as businesses become more complex,” she says.
Paul Donohoe, managing director of challenger online accounting firm Tax Rebate Services, believes the government is tackling the issue from the wrong angle. “Instead of demanding the Big Four surrender clients, the government could look into incentivizing those in the FTSE 100 to choose smaller accounting firms,” he says.
Lord Prem Sikka, emeritus professor of accounting at the University of Essex and the University of Sheffield, says audits of major corporations need to be performed by a state body if independent audit quality is to be ensured.
In July, the Financial Reporting Council said 29 percent of 2020/21 audits it reviewed by the biggest seven accounting firms fail to meet the quality threshold.
“No producer of food, medicine, autos, or airplanes could remain in business while routinely delivering dud products that harmed stakeholders. They would be forced to compensate stakeholders and shutdown. None of that applies to auditing firms,” Sikka says. “Despite the long line of dud audits, big accounting firms are rarely abandoned by corporate elites.”