23 November 2022 Big Four Reform Marches On (at significant cost)

Big Four Reform Marches On
(at significant cost)​

What do you need to know this week?

Proposals to reform the UK’s audit industry are now expected to approach £1bn over the next 10 years according to a Financial Times article. In brief, under the so-called “managed share audit” the current plan is to obligate FTSE 350 companies to hire smaller accounting firms for as much as 30% of the available work to be done in parallel to any work carried out by one of the Big Four.

As it currently stands, 99% of the FTSE 100 uses one of the Big Four firms with 87% of the FTSE 250 doing the same. By diversifying the pool of auditors, FTSE 350 companies will collectively pay £100m more a year. Many business leaders and Big Four partners alike criticise the plan on the basis that it significantly adds to cost without necessarily guaranteeing any substantive changes.

The reforms also proposes, among other measures, a new statutory regulator to oversee the conduct of accounting firms called the Audit, Reporting and Governance Authority.

As a matter of UK company law, all companies of a certain size must publish audited accounts once a year. In theory, independent accountancy firms review their clients’ books in detail to uncover mismanagement, misstatements, or fraud.

Why is this important for your interviews?

In nearly all large corporate transactions and many other commercial matters, lawyers work closely with their client’s accountants. But unlike the legal sector, which is characterised by a healthy spread of competitors, you are far more likely to work alongside one of the Big Four on any given matter. If these proposals come to pass, the culture of professional services is likely to change, including for law firms. Therefore, understanding the rationale for the proposed reforms will demonstrate to interviewers the breadth of your commercial understanding.

We have looked previously at the proposed reforms the government is trying to press upon the Big Four professional service firms due to regulatory and competition concerns. Specifically, EY, KPMG, PwC, and Deloitte have all on separate occasions failed to exercise their statutory audit functions and properly scrutinise the books of their clients. In particular, the Big Four failed to adequately review the accuracy of three large companies’ books — Carillion plc, Thomas Cook Group, and BHS. This in turn meant that when they collapsed, investors and regulators were caught unaware when this should have been flagged by the auditors.

As a corollary, regulators believe that the Big Four are nearing the “too-big-to-fail” threshold. By requiring the nation’s largest companies to hand out a portion of their work to smaller audit firms, the government argues it will encourage competition and minimise the risk if one of the Big Four collapses.