December 18, 2018 / 1:23 PM / a month ago

Breakingviews - UK audit reform leaves unfinished business

The logo of KPMG at La Defense business and financial district in Courbevoie near Paris, France. May 16, 2018. REUTERS/Charles Platiau

LONDON (Reuters Breakingviews) - The UK’s root and branch review into audit firms leaves unfinished business. Britain wants smaller book-keepers to have a bigger share of the market, and stricter Chinese walls between consulting and auditing. The reforms should help competition, but they may not do much to make audits much more reliable, or avoid crises like Carillion.

The Big Four accountancy firms were due a shake-up. The collapse of outsourcer Carillion, whose accounts were approved by KPMG before its failure has forced the government to make the sector better at spotting dodgy accounting, and less dependent on just four players: KPMG, EY, Deloitte and PwC. 

The proposals, outlined on Tuesday by the UK government and Competition and Markets Authority, are less draconian than the bean counters might have feared. KPMG, EY, Deloitte and PwC will create individual management, pay structures and accounts for their consulting and audit units, a move designed to prevent conflicts of interest. They will also have to share work with smaller firms, as all companies included in the FTSE 350 index will need two auditors. That’s small beer compared to proposals by opposition leader Jeremy Corbyn, who wants to break up the Big Four.

Having two audit firms should ensure more business for smaller groups. In France, where a similar regime exists, some 13 of the 100 largest listed companies are audited by smaller book-keepers. This compares to just one in the UK. Still, any progress is likely to be slow, and having joint auditors will create its own set of problems. Under the CMA’s proposals, the two firms would divide up the auditing work and jointly sign off on the accounts. That means neither would get a full overview of the company, and fraudulent activities could be passed to the less-experienced partner. The CMA would have done better to impose limits on auditors’ market shares.

The reforms may also not end potential conflicts of interest. Forcing auditors to spin off their consultancy businesses would have been a major hassle for the Big Four. But the compromise of having separate business units may not stop, for example, auditors from one company from recommending their colleague’s services, or consulting revenues subsidising book-keeping. 

The UK’s efforts are a step forward, but still only deserve a qualified approval. Deeper change will probably have to wait for another Carillion.

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