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U.K. to break up dominance of Big Four accountancy firms

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The U.K.’s accountancy regulator should be scrapped and replaced with a new body that has legal powers to improve the quality and standards of the auditing profession, the U.K. Government has said. A consultation has been launched with ministers saying the new rules, backed with legislation, will help avoid future large-scale company collapses, as auditors will be able to spot problems sooner.

Proposals also include plans to break up the dominance of the ‘Big Four’ accountancy firms -KPMG, Deloitte, PwC and EY- in the auditing sector, in order to avoid conflicts of interest. Business Secretary Kwasi Kwarteng, whose department is overseeing the changes, said: “Restoring business confidence, but also people’s confidence in business, is crucial to repairing our economy and building back better from the pandemic.

“When big companies go bust, the effects are felt far and wide with job losses and the British taxpayer picking up the tab. “It’s clear from large-scale collapses like Thomas Cook, Carillion and BHS that Britain’s audit regime needs to be modernised with a package of sensible, proportionate reforms.” Large companies would be required to use smaller auditor firms to conduct part of their annual audit, in an attempt to break the Big Four’s dominance.

And the Big Four could also face a cap on the number of companies on the FTSE 350 if improvements are not made. The government said last year almost a third of audits inspected on the FTSE 350 were in need of improvement. The largest private companies in the UK would also be expected to face greater scrutiny from regulators under the new rules. A new accountancy watchdog – the Audit, Reporting and Governance Authority (ARGA) – would be launched to implement the changes, replacing the Financial Reporting Council (FRC), including legal powers to force auditors and companies to resubmit their accounts without the need for court action.

Directors of failed firms could also see their bonuses clawed back up to two years after a pay award is made, to clamp down on “rewards for failure”. Greater transparency in accounts would be expected to avoid large dividend and bonus payments being made at firms that could be facing insolvency – with “resilience statements” required. Auditors would also be expected to take a wider range of information into account, including environmental targets. Ed Miliband, shadow business secretary, said: “There are real questions about whether this package is sufficient to reform the broken audit market.

«There are some proposals we welcome, including tougher penalties for individual company directors where there are serious failings, however it is regrettable that on the crucial issue of competition in the audit sector, the package waters down some of the independent recommendations for reform, including on mandatory joint audits between the big four and challenger firms.” The consultation accepts the vast majority of recommendations made by three independent reviews into auditing and corporate reporting.

report by Sir Donald Brydon in 2019 called for wider information and transparency, alongside enforceable principles for the profession. This followed a report by Sir John Kingman in 2018, which said the FRC should be scrapped and stricter rules placed on company directors. And a report by the Competition and Markets Authority last year said the Big Four should be split up to avoid market dominance.

 

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