The pressure is on to fix the broken audit market

Accountancy may be “an art, not a science”, but there needs to be less “Jackson Pollock”.

That’s according to the Labour MP Rachel Reeves, chair of the Business, Energy and Industrial Strategy Select Committee, who has made it her mission to fix the broken audit market.

The Big Four firms (PwC, Deloitte, EY, and KPMG) are responsible for auditing 97 per cent of FTSE 350 businesses. The next biggest, Grant Thornton, is a quarter of their size. High-profile audit failures, like the collapse of Carillion, have brought the market into the spotlight, and it is already being investigated by the Competition and Markets Authority – plus there’s the Kingman review into its regulator, the Financial Reporting Council.

But on Monday, Reeves launched her own parliamentary inquiry, sparking speculation that MPs may call for more radical, immediate action.

Some of the solutions proposed so far have merit. A market cap (backed by mid-tier firms BDO and Mazars) to limit the amount of business each auditor can take on could help open the market to smaller players, as long as it were set in the appropriate place and didn’t represent too much intervention in the market. Joint audits are also an option, whereby smaller firms would partner with one of the Big Four to gain experience, although there are questions over where the liability would lie – and who would pay.

But it is the more radical proposals that have attracted the most attention: either an independent body to appoint auditors to companies, or breaking up the Big Four altogether. Both have the potential to create more problems than they solve.

The former – endorsed by Grant Thornton – would remove accountability for audit from a company’s board, muddying the waters about who is responsible for audit failures. The latter (the rallying cry of Liberal Democrat leader Sir Vince Cable and shadow chancellor John McDonnell) is likely to reduce the number of players in the market, and thus result in even less competition.

Before officials get too excited about new regulations, they must consider how the market first became so dysfunctional. The issue is partly supply-driven, with financial disincentives like low fees and prohibitively high fines making big audit an unattractive proposition for smaller firms.

The likes of Grant Thornton and BDO need the opportunity to scale up, but this cannot happen overnight, not when you consider the gulf in size compared to the Big Four.

Increasing competition is a complex problem that requires time and careful consideration. Showy regulatory quick fixes should be avoided.