After months of debate, the Competition and Markets
Authority (CMA) has decided to investigate the auditing market
following the scandal over KPMG’s contract with
construction company Carillion, which collapsed earlier this
"If the many critics of the audit process are right, it is
not just the companies which buy audits that lose out; it is
the millions of people dependent on savings, pension funds and
other investments in those companies whose audits may be
defective," said Andrew Tyrie, chairman of the CMA.
The CMA has set a deadline of October 30 for the
UK’s biggest firms to provide feedback and the
watchdog aims to release provisional findings before Christmas.
The Big 4 have broadly welcomed the competition review after
several months of private talks on audit reform.
"We are supportive of measures that encourage choice as well
as a robust audit market," said Stephen Griggs, managing
partner of audit at Deloitte. "Achieving this will be complex
and any future framework also needs to include a focus on audit
quality across all listed companies."
Bill Michael, UK chairman at KPMG, said: "We all want to
build trust in corporate Britain and be part of an environment
that delivers the right results for capital markets, investors
The CMA views this investigation as the next step from Sir
John Kingman’s independent review of the Financial
Reporting Council (FRC). The regulators are considering banning
accounting firms from providing consulting services to audit
"We continue to identify problems with insufficient
challenge of management and professional scepticism exercised
by auditors when auditing key judgement areas (for example,
goodwill impairment or long-term contracts)," the FRC told the
At the centre of the debate on auditing is the potential for
conflicts of interest in the accounting industry. However, the
CMA has hinted it will not support breaking up the Big 4 due to concerns this
would undermine the quality of audit services in the UK.
"We’re up for change and we’re up
for more choice in the audit market, but breaking up firms does
not improve audit quality," said Kevin Ellis, UK chairman at
PwC. "We need to think through changes that create choice but
do not damage quality."
This may limit the UK to a few options, including a market
share cap to reduce concentration or an independent public body
to appoint auditors for the biggest companies. Given that the
Big 4 count most of the UK’s largest companies
among their client bases, this is no small matter.
Even mid-tier firms like Grant Thornton and BDO, who stand to gain
from reforming the market, part ways over the details of what
the reforms should look like.
"We’re not in favour of a market share cap
alone to address the high levels of concentration," said Jon
Roberts, head of audit at Grant Thornton. "We need some kind of
market management with an independent body."
"A cap on the number of companies that any one firm can
audit will inevitably result in an increase in audit quality,"
argued Gervase MacGregor, head of advisory services at BDO.
"Having a public body policing auditor selection may deliver
change, but it would be deeply unpopular with the
Meanwhile, the Shadow Chancellor John McDonnell has ordered
a separate investigation into the accounting industry and its
regulatory standards. "We need a complete overhaul of the
entire regulatory framework for finance and business, to
promote openness, transparency, accountability and –
yes, where necessary – to impose appropriate
punishments," he told the press.
Long-term critic Professor Prem Sikka is chairing the
inquiry and the report may be out before the end of 2018. This
may add to the pressure on the CMA to find answers sooner
rather than later.
At the start of 2018, there was near certainty about what
the audit market would look like for years to come. Now the
terrain is starting to shift underneath the feet of British
accountants just as the year has entered its final months.