MPs launch inquiry into future of ‘broken’ audit sector
A powerful parliamentary committee will launch an inquiry into the “broken” audit market today, aimed at ensuring an ongoing competition probe ends the “overwhelming market domination” of the Big Four.
Labour MP Rachel Reeves will announce the inquiry – by the Business, Energy and Industrial Strategy (BEIS) Select Committee which she chairs – during a speech this morning.
She will say recent audit scandals at BHS, Carillion and Patisserie Valerie “have contributed to the collapse of major businesses and undermined public and investor confidence.”
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The BEIS review – which will be the sixth simultaneous review the sector is facing – will look at the future of audit, aiming to ensure that the findings of a current Competition and Markets Authority (CMA) probe, and a review led by Sir John Kingman into the sector’s regulator, the Financial Reporting Council (FRC), translate into practical change.
The committee will call witnesses in the new tear, and aims to both inform the CMA’s inquiries and help develop plans for reform.
It will invite responses to the findings of Kingman and the CMA, and seek suggestions for further changes.
In her speech, at Chartered Accountants Hall, the headquarters of the Institute of Chartered Accountants in England and Wales (ICAEW), Reeves will say “the audit market is broken,” adding: “too often in the past corporate and regulatory failures have been followed by reviews which have been left to gather dust rather than result in concrete action.”
She will argue the “overwhelming market domination” of the Big Four – Deloitte, EY, KPMG and PricewaterhouseCoopers, which collectively audit 97 per cent of the FTSE 350 – has “failed to deliver audits which are fit-for-purpose”.
“The lack of meaningful competition has bred conflicts of interest at every turn,” Reeves will tell attendees. “The dice are loaded in the Big Four’s favour, as they snap up audit contracts while pocketing huge fees for consultancy work and providing advice on recovering failing businesses.”
“Our committee’s inquiry on the future of audit seeks to ensure these reviews are acted upon swiftly and effectively and that they genuinely deliver the improvements to audit quality and corporate governance which businesses, investors, pension-holders and the public expect,” Reeves will say.
Responses to the CMA’s fast-moving review, which aims to report by the end of the year, have been trickling out over the past two weeks. Last week, KPMG announced it would withdraw from selling non-audit services to its FTSE 350 audit clients, preempting a potential rule change that has also been supported by EY.
EY and Deloitte have both called for tough, US-style audit rules, in which company bosses are made to take personal responsibility for mistakes in their companies’ accounts.
Read more: Deloitte calls for audit market cap and ban on selling extra services to audit clients
In May, the BEIS committee published a damning joint report with the Work and Pensions Select Committee, which slammed the Big Four for their role in collapse of contractor Carillion and called for an investigation into their dominance of the high-end audit market.
The inquiry was welcomed by Stephen Haddrill, head of the FRC, who announced earlier this month that he will step down at the end of next year. He said the FRC would “welcome parliamentary support in the event the Kingman review agrees that our statutory remit should be enhanced.”