The UK announced a “major overhaul” of its audit regime on Thursday in a bid to break up the dominance of ‘Big Four’ audit firms, after the collapse of companies including Thomas Cook, Carillion and British Homes.
The government said it wants large businesses to be more transparent about their finances, helping to avoid company failures and job cuts, and to “strengthen UK’s position as a world-class destination for investors by improving the quality of corporate reporting and sharpening focus on long-term success of large companies.”
The Department for Business, Energy & Industrial Strategy said in recent years, investor and public confidence in how businesses are governed has been undermined by large-scale company failures, leading to the British taxpayer picking up the bill.
Last year, almost a third of FTSE 350 audits inspected were in need of improvement, it added.
Business secretary Kwasi Kwarteng said “restoring business confidence, but also people’s confidence in business, is crucial to repairing our economy”
"It’s clear from large-scale collapses like Thomas Cook, Carillion and BHS that Britain’s audit regime needs to be modernised with a package of sensible, proportionate reforms,” he added.
The new proposals suggest big firms should be required to use a smaller “challenger” firm to conduct a portion of their annual audit, “watering down the supremacy” of big-name auditors that put markets at risk whilst boosting jobs and growth of smaller audit firms across the country
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The Big Four (PwC, Deloitte, KPMG and EY) could also face a cap on their market share of FTSE 350 (^FTLC) audits if competition in the sector does not improve, the government warned.
PwC was the auditor of BHS, while KPMG oversaw Carillion accounts.
Deloitte was fined £15m ($19.7m) last year for misconduct after UK regulators investigated its audit of British software firm Autonomy ahead of a takeover by US tech giant Hewlett-Packard.
And EY has been linked to fraud probes into activities at Denmark's Danske Bank as well as Germany's Wirecard.
As per the government's proposals, a new regulator, the Audit, Reporting and Governance Authority (ARGA), would oversee the largest unlisted companies as well as those on the stock market. ARGA would replace the Financial Reporting Council (FRC).
Sir Jon Thompson, CEO of the FRC said the body "is already delivering on its commitment to transform, implementing reform across a variety of areas, where we are able to do so. This includes the operational separation of the Big Four audit practices, stronger and more timely enforcement and revisions to standards to drive higher quality work."
"We will now work with colleagues in government and other regulators to ensure that the UK has an effective and clear regulatory framework," he added.
The UK wants audits to extend beyond a company’s financial results to look at their wider performance, including against key climate targets, to ensure investors are fully informed.
Directors of large businesses could face fines or suspensions in the most serious cases of failings – such as significant errors with accounts or hiding crucial information from auditors.
Companies could be expected to write into directors’ contracts that their bonuses will be repaid in the event of collapses or serious director failings up to two years after the pay award is made.
Large businesses would need to be more transparent about the state of their finances, so they do not pay out dividends and bonuses at a time when they could be facing insolvency, the government's proposals state.
Chris Cummings, CEO of the Investment Association, said "this consultation is an important next step in implementing much-needed audit reform, helping deliver better quality audits for shareholders, who rely on their quality and robustness when making investment and stewardship decisions."
Meanwhile, Suren Thiru, head of economics at the British Chambers of Commerce, noted that "the focus on making improvements to the audit industry is a positive step... However, government and regulators must tread carefully to avoid unintended consequences, including adding to the already onerous cost burden on firms and undermining the UK’s global reputation as great place to do business.”