October 31, 2018 / 4:48 PM / a year ago

UK accounting body, investors back Big Four market shake-up

LONDON (Reuters) - The “cosily competitive” Big Four accounting firms, who check the books of 97 percent of Britain’s 350 largest companies, need stronger rivals to avoid becoming too-big-to-fail, officials and investors told a UK competition inquiry into auditing.

The logo of Ernst & Young is seen at a branch in Zurich, Switzerland October 24, 2018. REUTERS/Arnd Wiegmann

EY, KPMG, Deloitte and PwC have come under intense scrutiny in Britain for failing to spot impending company collapses, and for juggling audits and more lucrative non-audit work for the same clients.

The Competition and Markets Authority (CMA) has launched a fast-track review of the audit sector, saying all options are on the table after calls from members of parliament to break up the Big Four.

Initial findings are due by year end.

The ICAEW, an accounting industry body, said in a submission to the inquiry that there was consensus across the profession that more auditor choice is needed, such as by capping the Big Four’s market share.

It called for early and urgent action, though results could take a few years.

The CMA may publish draft recommendations, or open an in-depth investigation that could take a year or two.

The ICAEW said the sector could make specific changes straight away to avoid an in-depth probe.

“We believe that ring-fencing within the largest firms to separate audit and non-audit services is an option worth investigating,” the ICAEW added.

The Investment Association, which represents asset managers, said the Big Four appear to be largely ‘cosily competitive’ with each other, but cautioned against breaking them up.

A limited ban on an accounting firm also offering non-audit services to the same client could be introduced, the IA said. Investors, however, were unsure that a market share cap could work in practice.

The Financial Reporting Council (FRC), which regulates the audit sector, has prompted some alarm in the industry by slapping record fines on accountants in the face of high profile collapses, like at retailer BHS.

In June the FRC fined PwC a record 6.5 million pounds for failing to flag problems at BHS.

“There is a serious risk with such a small pool of auditors dominating the market that regulators feel unable to impose significant sanctions without risking driving one of the key players out altogether,” said Liz Murrall, director of stewardship and reporting at the IA.

“The prospect of the Big Four becoming the Big Three risks making the audit sector too big to fail.”

The ICAEW said the risk of very large FRC fines is also making it less attractive for mid-tier accounting firms to take on the Big Four.

Reporting by Huw Jones; Editing by Alexandra Hudson

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