October 9, 2018 / 10:45 AM / 9 days ago

UK watchdog opens fast-track review of audit sector

LONDON (Reuters) - Britain’s Competition and Markets Authority (CMA) has launched a fast-track review of the audit sector with all options on the table to improve choice and book-keeping quality for companies.

FILE PHOTO: The Canary Wharf financial district is seen from the Broadway development in central London, Britain, August 23, 2017. Picture taken August 23, 2017. REUTERS/Hannah McKay/File Photo

The review announced on Tuesday follows calls this year by British lawmakers who wanted the CMA to consider breaking up the Big Four accounting firms, EY, KPMG, Deloitte and PwC, who check the books of nearly every big listed company in Britain.

The CMA said it has launched a detailed study after concerns over the collapse of construction company Carillion and poor results from reviews of audit quality.

“As part of its review, the Competition and Markets Authority will investigate whether the sector is competitive and resilient enough to maintain high-quality standards,” the CMA said in a statement.

The CMA’s predecessor, the Competition Commission, recommended five years ago that Britain’s top 350 listed companies put their audit work out to tender at least every decade, but the result has been a Big Four merry-go-round, with smaller rivals such as Grant Thornton and BDO making little headway.

“Given the in-depth thinking already done by the CMA and the Competition Commission before it, we plan to move swiftly and to issue our provisional findings before Christmas,” said CMA Chief Executive Andrea Coscelli.

Britain’s business minister, Greg Clark, welcomed the review, saying: “I would encourage the CMA to be ambitious in its thinking and move swiftly on this issue.”

The CMA market study will examine how easy it is for companies to switch auditor and whether the Big Four’s dominance threatens long-term competition.

INEPENDENT APPOINTMENT?

The watchdog will also consider whether big listed companies should be prevented from choosing their own auditors. One alternative suggested already is for such companies to have auditors appointed by an independent body.

“If the CMA finds evidence that the market is not working well after examining these areas, it will scrutinise all proposals for tackling them,” the watchdog said.

The Financial Reporting Council (FRC), which polices audits, said it has already expressed concern about concentration at the top end of the market.

Britain’s leading accounting firms have previously proposed voluntary caps on audit market share, but Tuesday’s announcement of a formal review suggests tougher action is more likely.

The FRC’s powers are being reviewed independently after lawmakers said it was too timid in how it dealt with poor audits from the Big Four.

CMA Chairman Andrew Tyrie said the review of the FRC is a “big step” in the right direction.

“The CMA will now examine the market carefully to establish what contribution more effective competition could make to improving audit quality,” said Tyrie, who criticised the FRC for being ineffective when he was a lawmaker.

The watchdog has written to the government to say that legislation may be needed to implement its findings and those of the review into the FRC.

The FRC announced on Monday it was working with the CMA to see if the Big Four should be banned from supplying consultancy services to clients whose books they check.

Reporting by Huw Jones; Editing by David Goodman

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