By Mark Fairlie.
The Competition and Markets Authority (CMA) is pressing for a major shake-up of the professional services firm sector. Currently dominated by four firms – Deloitte, EY, KPMG and PwC – they perform 97% of the UK’s company audits in addition to the provision of other services, according to BBC News.
Companies must have an audit performed on their financial accounts if they meet two or more of the following requirements:
- turnover of £10.2m or more
- assets worth more than £5.1m
- more than 50 employees on average at any point during the Company Tax Year (source: HMRC)
Audits are ways of making sure that the financial information they present to tax authorities and to the shareholder is “a fair and accurate representation of the transactions they claim to represent”, according to Investopedia.
The Big Four’s business model is underpinned by their auditing and accounting activities however each of them has, over time, transformed into “professional services firms” offering a variety of different services under each brand. They do this by forming large networks of independent firms working together to provide services through an organised framework.
In addition to auditing, they now offer “assurance services, taxation, management consulting, advisory, actuarial, corporate finance and legal services”. Some firms have even extended their range of services further into investment banking, insurance, real estate, and architecture.
The Financial Reporting Council, the overseeing body for auditing companies, is not happy. The Big Four’s auditing standards are “getting worse” with a decline of 6% in the number of audits which are “either perfect or only needed limited improvements” (source; Accounting Web). As a result, “less than three-quarters of audits hit a level that (accountants) would regard as being barely acceptable”.
In 2017, the top 5 auditing fines in 2017 were £5.1m for PwC over its RSM Tenon audit (“falls short of expected standards”), £5m for PwC over Connaught (“misconduct”), £4.8m for KPMG for Miller Energy (“gross overstatement of value of certain assets, counting some twice”), £1.8 for EY over Tech Data (multiple failures), and $1m for PwC’s Merrill Lynch audit (“failure to observe rules”).
Another major concern is a conflict of interest as consulting fees can earn the Big Four far more than accounting and auditing charges. EY was fined for “improperly close relationships with clients” and KPMG was penalised £2m for substandard auditing of client Ted Baker to which it provided auditing and accounting.
Grant Thornton was fined £3m after its former Manchester head of auditing continued to provide consultancy work to the firm as well as sitting on the auditing committee of two of Grant Thornton’s current clients.
Prior to the publication of the report, representatives from the Big Four were concerned that their businesses would be broken up by the Competition and Markets Authority. The CMA’s actual proposal is that audits performed on companies listed on the FTSE 350 Index be carried out by two companies, one of which would not be a member of the big four (source: Independent).
The CMA believes that “robust reform” is needed and that, at the moment, companies chose their auditor by assessing “cultural fit” or “chemistry”. It proposed that the system is amended so that firms choose the “most challenging firm” and not the cheapest.
In what many saw as a pre-emptive move, KPMG has announced that it will no longer provide consultancy services to the firms which it also audits.
According to the FT, the reason that the CMA did not want to break up the Big Four is that “it would be difficult to do without coordinated international action”. However, the Labour Party recently announced its intention to break up the Big Four.