Britain looks at alternatives to joint audit reform

By Huw Jones

LONDON (Reuters) – Britain’s business ministry said it was looking at options for reforming accounting in a sign that a radical overhaul outlined by competition authorities to improve standards may be eased.

Sky News reported on Monday that ministry officials say a central recommendation from the Competition and Markets Authority (CMA) in April that Britain’s top 350 companies should hire two auditors was “dead in the water”.

One of the auditors would have to come from outside the Big Four, the collective term for PwC, Deloitte, KPMG and EY that dominate auditing.

Both auditors would be fully liable for each audit but some industry officials say joint audits are impractical as auditors outside the Big Four do not yet have the resources to shoulder full legal responsibility for a string of major clients.

The CMA reviewed auditing after failures at builder Carillion and retailer BHS raised questions about audit quality, but the government has yet to say if it will implement the recommendations.

“As part of our ongoing consultation on audit market reform, we are discussing a range of policies with the industry,” a business ministry spokesman said in response to the Sky report.

“It will be for ministers to determine the policy once a new government is formed.”

Britain goes to the polls on Dec. 12 and legislation would be needed for mandatory changes, with Brexit eating into parliamentary time.

Simon Dingemans, chair of the Financial Reporting Council, the audit sector’s regulator, said in July he was not convinced that joint audits were the answer.

Michael Izza, chief executive of the ICAEW, a professional accounting body, called on Monday for “proportionate and practical” measures for reforming auditing given the global considerations for Britain.

The CMA, which had no comment, wants to meet with auditors, who say Big Four market share caps or “shared audits” would be more workable, an industry official said.

Shared audits refer to a main auditor, typically one of the Big Four, being liable for the audit, while a smaller auditor such as BDO, Grant Thornton or Mazars would audit part of the company but without the burden of liability.

“A number of challenger firms think that shared, rather than joint, audits are a sensible way to grow their business in the hope that they become realistic challengers to the Big Four in the fullness of time,” Izza said.

The CMA rejected market caps but recommended that the Big Four should run their audit and more lucrative consulting arms separately to avoid conflicts of interest.

The opposition Labour Party said in its election manifesto that if in government it would implement this.

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