The Financial Reporting Council (FRC), the U.K.’s audit regulator, announced plans this week to break up the dominance of the largest four accounting firms, Deloitte, EY, KPMG and PwC, according to the Financial Times.
The regulator issued letters to those firms, known as the Big Four, Thursday.
The plans, if put forth, would constitute a huge shake-up for the accounting industry in the U.K., and would essentially ask for the firms’ audit and consulting operations to be separated.
The move comes in the wake of the competition watchdog’s recommendation in 2019 for the government to facilitate a split of those services. Several officials have voiced concerns in the past about the firms’ dominance of the accounting industry, as well as questions of conflicts of interest in various scandals that have rocked the industry.
The Big Four are under pressure after a series of high-profile auditing failures, including the falls of names like BHS, Carillion and Thomas Cook. The firms are gearing up by storing hundreds of millions in preparation for fines that could come down on them.
But the government has not made any move to enact change, and the FRC is pressing the firms to break up of their own volition, so as to improve the quality of auditing. Under the proposal, the firms would make their audit operations fully independent businesses, with separate boards and independent chairs running them.
The FRC also said there should be a ringfencing of audit costs and profits. The FRC said partners in those businesses shouldn’t be remunerated any longer for the shared pool of earnings that encompasses firms’ consultants and tax advisors.
The FRC will give the firms time to comply with the proposals, but the regulator is due to be replaced with a stronger enforcement agency, the Audit Reporting and Governance Authority, which would likely have powers to break up the Big Four by force.
Claire Lindridge, director of audit firm monitoring and supervision at the FRC, said the regulator expected the firms to self-govern themselves and implement the recommended policies voluntarily. She said the goal was for audits to be “clear and transparent.”