June 18, 2018 / 2:45 PM / a month ago

Big Four accountants counting on capped market share to avoid break-up

* Previous reforms have failed to shake Big Four’s dominance

* Talks with competition watchdog already under way

* Cross-sector agreement needed, says accountancy body

By Huw Jones

LONDON, June 18 (Reuters) - Britain’s audit sector is heading towards caps on market share as the Big Four accountants embrace any potential reform that stops short of them being broken up, industry officials say.

Policymakers have tried for years to weaken the Big Four’s dominance. But reform requiring companies to consider switching accountants every 10 years — designed to keep auditors from becoming too cozy with clients — has merely made for a faster four-seat merry-go-round.

The prospect of greater public intervention, however, has been boosted after corporate scandals such as the collapse of retailer BHS in 2016 and this year’s demise of outsourcer Carillion raised fresh questions about whether auditors are too often asleep at the wheel and need shaking up.

“The audit market needs fixing,” Rachel Reeves, chair of parliament’s Business, Energy and Industrial Strategy Committee, told Reuters.

“The dice are loaded in the Big Four’s favour, enabling them to make a killing in fees advising struggling companies how to turn them round and then pocketing millions tidying up when that advice fails.”

The committee’s report into Carillion called on the Competition and Markets Authority (CMA) to examine a potential break-up of the Big Four of Deloitte, PwC, KPMG and EY, who check the books of most big listed companies across the world.

This would force them to separate audit and consulting arms that often court the same customers.

MARKET-LED SOLUTION?

Industry officials say contact between accountants and the CMA has begun and the sector’s hope is for an agreement within months to limit how many audits the Big Four can undertake and thereby head off more radical change.

“If asked, the profession would be willing to work with the CMA to develop a market-led solution on how to get from four to more,” said David Barnes, Deloitte’s global public policy partner.

The challenge facing smaller accountancy firms eyeing the top echelon is formidable.

Deloitte earned $38.8 billion in fees in the year to May 2017, just ahead of PwC on $37.7 billion in its financial year, according to the International Accounting Bulletin. EY earned $31 billion and KPMG $26.4 billion,

Among the next layer down, BDO earned far less at $8.1 billion, with RSM and Grant Thornton picking up $5 billion each.

The Big Four each employs 200,000 staff or more, providing the global reach to audit international companies. BDO, RSM and Grant Thornton employ between 43,000 and 73,000.

Michael Izza, chief executive of the ICAEW professional accounting body, said there would need to be cross-sector agreement on which part of the market is capped to convince the CMA to go along.

The Big Four have suggested a limit on how many of Britain’s 350 biggest listed companies they can audit, phased in over 5-10 years. Smaller accountants, meanwhile, want the limit on Big Four audits to apply to companies on the next tier down.

“That would give them an opportunity to build capacity and then move up the market,” Izza said.

QUALITY CONTROL

Given that auditors are selected by a company’s audit committee, Izza said that market intervention may be needed to promote competition. Accountants, however, say that won’t necessarily improve audit quality and that other reforms are also needed for that.

Carillion highlighted a gap between what the public expects from an audit and what the process can deliver.

To help to bridge this, accounting firms, government and regulators have formed a “coalition of the willing” for an independent review of the future of audit, but several people who have been approached to lead the review have all declined, Izza said.

“There is a lot of concern about this subject and it’s a pretty big task,” he added.

A separate government-backed review is looking at whether the Financial Reporting Council (FRC), which regulates accountants, needs more powers to stamp out bad auditing.

Izza said the FRC’s focus should be on “bread and butter” audit quality while also looking to enforce corporate governance codes and regulate actuaries.

The FRC, described as “timid” by lawmakers in their Carillion report, slapped a record 6.5 million pound ($8.6 million) fine on PwC this month over how it checked the books of retailer BHS.

Accountants need to be a “little bit afraid” of the FRC, though not to the extent that it puts people off wanting to check the books of public companies, Izza said. ($1 = 0.7549 pounds)

Reporting by Huw Jones Editing by David Goodman

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