Outside the accountancy profession, and certain academic circles, the Big 4 would be assumed to be a variation of a Big Mac, or some souped-up engine configuration for a gas-guzzling vehicle.
In fact, it refers to the four major audit firms that between them audit most of our major businesses, banks and other institutions that are required to audit their accounts.
The Competition and Markets Authority (CMA) has their beady eye on this sector, and the Big 4 in particular, as it is apparent – following recent large-scale business failures – that all is not well.
The CMA has now published its final report intended to address serious competition problems in the UK audit industry. If adopted, their recommendations would see:
- Audit work and the more lucrative consultancy work being split. According the CMA, this will require separate management, accounts and remuneration, a separate CEO and board for the audit arm; separate financial statements for the audit practice; an end to profit-sharing between audit and consultancy, and promotions and bonuses based on the quality of the audits.
- Mandatory joint audits. Challenger firms should work alongside the Big 4 in these joint audits and should be jointly liable for the results. There should be initial limited exceptions to the requirement, based on criteria set by the regulator, focused on the largest and most complex companies. In addition, any company choosing a sole ‘challenger’ auditor should be exempt. Audits of exempt companies may be subject to rigorous, real-time peer reviews commissioned by and reporting to the regulator. The joint audit requirement should remain in place until the regulator determines that choice and competition have improved enough to address the vulnerability of the market to the loss of one of the Big 4.
The CMA also propose:
Regulation of UK companies’ audit committees
It is essential that audit committees choose auditors by seeking those likely to provide the most robust and constructive challenge to the accounting practices of their companies. The CMA recommends that the regulator should hold audit committees more vigorously to account. This may include ensuring that committees report their decisions as they hire and supervise auditors, and that the regulator issues public reprimands to companies whose committees fall short of adequate scrutiny of their auditors
A 5 year review of progress by the regulator
The regulator should review the effects of these changes periodically, in the first instance five years from full implementation. This should consider in particular: the merits of moving to independent appointment for auditors; whether to go beyond the operational split already proposed; and how to fine-tune the joint audit remedy to adapt to market developments.
Reading these recommendations, it is easy to see why “the-man-in-the-street” will likely be bemused by these statements and quickly revert to asking for a Big 4 for lunch. It remains to be seen if the changes will be adopted or if the Big four will continue to exert their monopoly with impunity.