Deloitte warns breaking up Big Four auditors would hurt City’s reputation
Deloitte has warned that a break-up of the Big Four accountancy firms in the wake of Carillion’s collapse could harm Britain’s standing as a global financial centre at a time when the City is already battling Brexit pressures.
The professional services giant has written to the heads of a joint parliamentary committee after MPs raised serious competition concerns in the UK auditing industry during its inquiry into Carillion’s demise.
While Deloitte acknowledged concerns about the dominance of the so-called Big Four – which includes its rivals KPMG, PwC and EY – it said the UK’s reputation may suffer if firms are forced to split.
“The Committees, and other commentators, have suggested that the break up of the largest professional services firms should be examined as a means of increasing competition and ensuring audit quality,” Deloitte said.
“We do not believe that this is a viable solution to either matter and would be concerned that it would damage both audit quality and the UK’s position as an attractive capital market.”
Deloitte added that “ongoing support” for the audit profession was “vital” in underpinning confidence in the UK “and the role that we all hope this market will continue to play in the economy as we prepare to leave the European Union”.
PwC also wrote to the committees, saying it was “clear” that a break-up of the large firms would impact audit quality and that barriers to entry to the “complex market” should be broken down to support competition.
“These barriers include increased auditor liability, greater regulatory scrutiny and the need for significant investment,” it said.
The comments were part of correspondence with the Business, Energy and Industrial Strategy and Work and Pensions Committees, which were released as part of a raft of responses to an inquiry into what went wrong at Carillion.
The Big Four have been accused by MPs of prioritising their own profits after pocketing around £71.6 million in Carillion-related work since 2008, including on its pension schemes, according to a separate report by the committees.
EY’s UK chairman Steve Varley said that Carillion’s stakeholders may have been better served in the wake of its collapse if certain reforms were considered.
Citing EY’s restructuring partners, Mr Varley said lessons could be drawn from US insolvency procedures, which “gives greater protection to companies as they prepare their restructuring plans”.
He also pointed to the development of so-called “living wills”, which gained popularity among systemically important banks in the wake of the financial crisis and set out contingency plans for their services if firms run into difficulties.
“We believe that without action of this kind, the UK’s position as a location where businesses can successfully restructure and survive is at risk of dropping, in relative terms, as other jurisdictions, including the EU, update their insolvency and pre-insolvency legislation,” Mr Varley said.
But Frank Field, chairman of the Work and Pensions Committee, accused auditors of passing the buck.
“Once again, the fingers are out pointing everywhere but here. The Big Four admit there is a problem but insist their break-up is no part of the solution,” he said.
The MP also challenged former Treasury Select Committee chairman Andrew Tyrie to shake up the market and prove himself as the incoming head of the Competition and Markets Authority (CMA).
“How the CMA deals with the lack of audit competition will be the sign of whether the new chairman is able to break this existing culture and impose a new one which makes clear that his organisation is about delivering for individuals, and not for cosy oligopolies,” Mr Field said.
It follows earlier calls for Mr Tyrie to “demonstrate what a new broom you are at the CMA” by initiating a review of the audit market.
The incoming CMA boss said the committees’ joint report “raises important issues”, many of which the competition watchdog was already considering.
“You should be aware that I do not expect to take up my post for a month,” Mr Tyrie said.
“When I arrive, I will certainly bear in mind your advice, not least about brooms.”