In the wake of the Carillion scandal, is it time to break up the Big Four accountancy firms?
Rachel Reeves MP, chair of the Business, Energy and Industrial Strategy Committee, says YES.
Virtually all the FTSE 250 are audited by the Big Four. This cosy and complacent club has long, lucrative relationships with these companies. It is not in their interests to risk the huge fees they rake in for their services by providing genuine challenge and criticism. This explains the failure of auditors to warn of the catastrophic failings at Carillion.
Conflicts of interests mean that the options are even more restricted. The Big Four do sensitive work for companies and their competitors. Can we really have confidence in the strength of Chinese walls? PwC was chosen to help the Insolvency Service clear up the mess because it was the least conflicted of the Big Four. That meant that it could then name its price for its ongoing work.
The market does not work. There are too few players and it is impossible for ordinary competitors to enter this lucrative international market.
There is not enough pressure on quality or price: Carillion is the result. That must change.
Michael Izza, chief executive of the Institute of Chartered Accountants in England and Wales, says NO.
The joint inquiry into Carillion by the Work and Pensions and BEIS Committees has called for the Competition and Markets Authority to investigate breaking up the Big Four.
But the underlying question is how we can improve competition in the listed audit market – and Im not sure this is the answer.
Firms at the next level down – even major contenders like Grant Thornton – have reservations about entering this market. Breaking up the Big Four would create additional smaller firms, but there is no guarantee that these would want to take on big audits, unless we address why others are so reluctant.
Splitting off audit to create audit-only firms presents other challenges. Such firms would have to buy in the expertise they currently obtain from colleagues – raising costs, which would then be passed on to businesses.
If we want to increase competition in the audit market, we need to make it more appealing to new entrants, not less for those already there.