In response to concerns raised in the UK about high-profile audit failures involving companies such as Carillon Plc and BHS Group Ltd., the United Kingdom's Competition and Markets Authority (CMA) initiated a review of the UK's audit sector, seeking to learn whether audit reports are of sufficient quality to protect the public interest. Other issues being investigated include whether the sector is competitive enough and whether continued use of the sector's "big 4" accounting firms (Deloitte, PwC, Ernst & Young and KPMG) to audit the vast majority of UK public companies renders the firms "too big to fail".
The announcement followed an earlier statement by the UK's Financial Reporting Council (FRC), which regulates auditors, accountants and actuaries, that it would put the independence rules to the test to determine whether additional actions are needed to ensure auditor independence and audit quality. The FRC also released a report entitled, Developments in Audit, which describes various initiatives the FRC has begun in response to concerns about audit quality (enhanced enforcement and monitoring of the largest firms), and commentary on audit market concentration, investor confidence, future of the audit and other issues.
Radical approaches are on the table, including breaking up the big 4 accounting firms into their audit and nonaudit service components. According to an article appearing in Bloomberg, "The CMA said a structural break-up of the big four into smaller firms could pose "significant and potentially insurmountable challenges," according to a consultation document. Splitting up the auditors would need to be introduced on "an international basis to be most effective," the regulator said."
Other options being considered are a ban on consulting services for audit clients, imposing a market share cap on auditors or requirement for joint reviews, ensuring that two audit firms sign off on accounts.
