The UK competition regulator, CMA has advocated the split of audit and consulting arms of the big four consulting firms - PwC, EY, KPMG and Deloitte into separate operating units to prevent the smaller auditing divisions from getting affected by the consulting practices.
The top 350 listed companies in Britain have to consider hiring two auditors apart from the big four firms to expand the market, recommends CMA.
CMA’s recommendations aim at improving audit quality and restoring trust post high-profile corporate failures in recent months. Accounting failures at construction company Carillion and retailer BHS have demanded a need for increased scrutiny of audit committees.
The CMA recommendations indicated a "back to basics" approach and were presented in a separate review of the audit industry.
Donald Brydon led ‘UK government-commissioned review’ will go hand in hand with a review on the UK regulatory framework.
CMA Chairman, Andrew Tyrie advocates the requirement of legislation instead of conducting more reviews.
As per CMA audit services market final report, the big four firms face an inherent conflict of interest of audit partners. Due to growth in the size of the non-audit business and the profit-sharing motive, there has been an increased interest of audit partners in non-audit business.
The CMA recommendations have received a mixed response from the Big Four firms’ spokespersons.
Contrary to the CMA’s proposal, EY warns that the operational split of the big four would undermine audit quality and would reduce the company’s ability in making use of its significant business capacity, skill set and investment.
EY argues that CMA’s recommendation of mandatory joint audits lacks the evidence that it would improve audit quality or auditor choice as joint audits face opposition from companies in their submissions to the market study.
PwC UK warns of unintended consequences due to CMA’s proposal. PwC spokeswoman adds that the application of such recommendations should be well strategized so that they provide the required outcomes and avoid any unexpected effects.
According to Mr Stephen Griggs, Deloitte's UK managing partner for audit, the firm is worried as few CMA recommendations go against the objectives of increased choice and competition.
KPMG UK spokeswoman supported the idea of increased separation of audit and consulting arms of the big four. She believes that this model will still ensure that the company’s auditors will have access to the benefits of a diversified firm pertaining to advanced technology, expertise and global business strength. But she alerts that small-scale organisations might face difficulties in its audit offerings.
Also, the CIIA welcomed the CMA’s proposal, which it believed would ensure independent functioning of auditors and reduced business interest conflicts.
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