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Time to split audit from consultancy?

03 April 2019

The Competition & Markets Authority (CMA) should aim for the full structural break-up of the Big 4 firms into audit and non-audit businesses, says the Business, Energy and Industrial Strategy (BEIS) Committee.

It’s ‘Future of Audit’ report endorses the CMA’s proposed operational split between audit and non-audit work, but argues that going further with a structural break-up would prove more effective in tackling the conflicts of interest and providing the professional scepticism needed to deliver high-quality audits.

The report said that the Big 4 accounted for 97% of the FTSE 350 audits and 99% of the FTSE 100 audits in 2016-17. To improve resilience and choice, MPs are recommending a segmented market cap and the use of joint audits, on a pilot basis, for the most complex audits to enable the challenger firms to step up. Audit rotation also needs to be move to seven-year non-renewable terms, with a cooling off period of 3 years, in which non-audit services cannot be offered to a former audit client.

Chair of the BEIS Committee, Rachel Reeves said: “Change in the audit marker is long overdue. The reviews from the CMA and Kingman highlight the failings; now we need action. The Big 4’s dominance has fostered a precarious market which shuts out challengers and delivers audits which investors and the public cannot rely on.”

She went on: “For the big firms, audits seem too often to be the route to milking the cash-cow of consultancy business…The Big 4 may not like it, they may seek to undermine the case for reform, but vested interests should not be allowed to get in the way of positive change.”

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