The U.K. practices of the world’s biggest accounting firms face a major overhaul as the Competition and Markets Authority (CMA) looks into whether they should be broken up.

The United Kingdom’s competition watchdog has outlined “serious” competition concerns caused by the Big Four’s dominance of the audit market and has proposed changes to legislation to improve the sector and allow other audit firms greater access.

The CMA wants to separate external audit from consulting services, impose a “joint audit” regime so that firms outside the Big Four can gain a bigger foothold in auditing the United Kingdom’s biggest companies, and introduce measures to substantially increase the accountability of those chairing audit committees in firms.

The regulator wants closer scrutiny of audit appointment and management to make sure that those appointing auditors are held to account and are independent enough to choose the most challenging audit firm, rather than—for example—the cheapest.

The CMA began a review of the sector in October following a damning report by members of Parliament into the collapse of construction giant Carillion, which demanded why the external auditor—as well as numerous other professional firms—did not spot any signs of trouble even when investors were dumping stock in droves.

KPMG audited Carillion for 19 years, pocketing £29 million (U.S. $36.6 million) in the process. Not once during that time did the audit firm qualify its audit opinion or exercise professional scepticism with regard to the financial statements.

“Most people will never read an auditor’s opinion on a company’s accounts. But tens of millions of people depend on robust and high-quality audits. If a company’s books aren’t properly examined, people’s jobs, pensions, or savings can be at risk.”

Andrew Tyrie, Chairman, CMA

Meanwhile, Deloitte was responsible for advising Carillion’s board on internal audit, risk management, and financial controls—failings in the business that proved terminal—and EY provided £10.8 million (U.S. $13.6 million) worth of “failed turnaround advice,” according to members of Parliament. They added that “the appearance of prominent advisors proves nothing other than the willingness of the board to throw money at a problem and the willingness of advisory firms to accept generous fees.”

In its review, the CMA said that audit quality is falling short because choice is too limited, and audit firms make at least 75 percent of their revenue from providing non-audit, consultancy-type services. It also found that companies choose their own auditors according to whom they have the best “cultural fit” or “chemistry” with rather than those who offer the toughest scrutiny.

Comments from the Big Four

None of the Big Four firms will have found the CMA’s announcement particularly surprising: Criticism concerning audit quality, conflicts of interest surrounding the provision of more lucrative consultancy-type services to audit clients, and a market that is essentially carved up between four major players has been growing steadily for at least two decades.

All of the firms say that they are reviewing the CMA’s recommendations; and all “welcome” the “valuable opportunity” to “engage” in the consultation process, which in the past has meant spelling out the dangers of trying to change the status quo too much (particularly through “burdensome” regulation).

In their statements, each of the firms either refers to the need to build up trust or restore confidence (or both in some cases). David Sproul, senior partner and chief executive of Deloitte, said that “it’s clear that trust and confidence in the role of the profession is not where it should be”, adding that “we are supportive of change that enhances audit quality and maintains the competitive position of the U.K. as we prepare to leave the EU.”

EY said that it believes that “the evolution of the audit product is vital to achieve effective and sustainable reform of the corporate reporting environment globally.” It added that it will “support workable measures that genuinely improve audit quality, strengthen the role of the audit committee, and modernise the audit product to meet the expectations of a wide range of stakeholders.”

“We recognise it is time for change and a watershed moment for the audit sector,” said Kevin Ellis, chairman and senior partner of PwC UK. “Audit quality must be front and centre of any reform.” He added: “The proposals will require careful and wide consultation in order to deliver practical remedies which serve the best interests of shareholders, companies, and society at large. We look forward to seeing the CMA’s report to better understand its findings and recommendations.”

KPMG has called the CMA’s suggestions “constructive,” but added that “it is important that any measures introduced are assessed carefully to make sure audit quality is maintained and improved. We will study the measures proposed by the CMA carefully and look forward to engaging with the next phase of consultation.”

Last month, KPMG said in a leaked memo that it would no longer do consultancy work for the U.K.’s biggest companies if it was also auditing them in order to “remove even the perception of a possible conflict” of interest.

—Neil Hodge

Post-crisis efforts to break up the Big Four’s stranglehold on the U.K. audit market have had unintended results: Auditor rotation and term limits introduced in 2014 have forced an even greater concentration in the audit market, with 98 percent of the FTSE 350 now audited by the Big Four, compared to 95 percent prior to the change. Worse still, audit quality appears to have weakened over the same period, according to the Financial Reporting Council (FRC), the U.K. corporate governance regulator.

CMA Chairman Andrew Tyrie said: “Addressing the deep-seated problems in the audit market is now long overdue. Most people will never read an auditor’s opinion on a company’s accounts. But tens of millions of people depend on robust and high-quality audits. If a company’s books aren’t properly examined, people’s jobs, pensions, or savings can be at risk.”

He added: “The CMA will now consult on a number of proposals for robust reform. These intractable problems may take some years to sort out. If it turns out that the proposals are not far-reaching enough, the CMA will persist until the problems are addressed.”

Just last week, the opposition Labour Party unveiled more radical proposals to break up the Big Four by capping their share of the audit market at 50 percent and making partners at the firms personally liable for any failures related to their work. It also proposed a new, state-backed body to audit the accounts of banks and other financial institutions.

Separately, the FRC—which regulates the audit profession—has also come under fire for its “shortcomings” in Legal & General Chairman Sir John Kingman’s review of its capabilities and effectiveness. Kingman recommends that the FRC is replaced by a new Audit, Reporting, and Governance Authority “with a new mandate, new clarity of mission, new leadership, and new powers” as “it is absolutely clear that the FRC in its current form could not take this new role on in a way which would command confidence.”

The CMA’s consultation on its update paper is open until 21 January 2019.