February 5, 2019 / 3:19 PM / 2 years ago

UK watchdog says market share caps would hasten audit reform

LONDON, Feb 5 (Reuters) - Caps on the market share of the dominant Big Four could accelerate reform of the British audit industry which otherwise risks being a “slow burn” over the next decade, lawmakers were told on Tuesday.

Auditors are finding their work questioned after approving the accounts of retailer BHS and construction company Carillion which later went bust, putting thousands of people out of a job.

The Competition and Markets Authority (CMA) has proposed that the top 350 listed companies hire two auditors, with one of them from outside the ranks of EY, KPMG, Deloitte or PwC — the Big Four that dominate book-keeping.

The aim would be to give smaller accountants such as Grant Thornton and BDO greater access to the market to increase competition and help lift standards.

“Joint audit is a pretty slow burn on its own,” Stephen Haddrill, chief executive of the Financial Reporting Council, the audit sector’s regulator, told a parliamentary hearing.

It would take a very long time to introduce joint audits for the very biggest companies, he said.

“Is the next tier of firms ready to step up to the plate?” Haddrill told parliament’s business committee. A realistic assessment of the ability of smaller auditors to break into the top end of the market was needed to see what they could achieve.

There was “something to be said” about market share caps on the Big Four, Haddrill added.

Michael Izza, chief executive of the ICAEW, a professional accounting body, said it could take 5-10 years for all top companies to have two auditors at a time when speedy results were needed to restore trust.

“The way to go forward is a segmented market share cap,” Izza said.

The CMA is due to publish final recommendations that would need changes in the law to implement, but parliament is clogged with business related to Britain’s departure from the European Union.

Big Four officials told the committee last week they backed market share caps, but its chair Rachel Reeves told Reuters she doubted their motives.

A separate review proposed replacing the FRC with a more powerful watchdog and Haddrill said he was waiting to see if the government would be appointing a new board.

A wider range of sanctions should also be considered, such as stopping an audit firm from taking on new clients for a fixed period, Haddrill said.

Reporting by Huw Jones Editing by Keith Weir

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