The Liberal Democrat leader, Vince Cable, has written to the Competitions and Markets Authority (CMA) asking the regulator to look again into whether the big four accountants should be broken up. Commenting on Twitter about the firms that dominate the audit market Cable said: “Questions remain over whether there is too much market dominance in too few hands.”

The former business secretary has also said in the light of Carillion’s liquidation and problems at Toys R Us UK– the toy retailer and electrical store Maplin went into administration this week –  that it was time to look into a Chapter 11 style scheme, as practised in the US, to help supply chains when big firms collapse.

Following an investigation by its predecessor organisation, the Competition Commission, into the statutory audit services market, the CMA introduced requirements for companies relating to their audit in 2014. These measures were designed to meet the requirements of the EU’s audit regulation and audit directive which came into force in 2016. In the UK the Financial Reporting Council is now responsible for enforcement of the rules.

The CMA’s measures included a requirement for FTSE 350 companies to put their statutory audit engagement out to tender at least every 10 years and measures to strengthen the accountability of the external auditor to the Audit Committee and reduce the influence of management.

audit market
Carillion collapse raises concerns about audit market

However, since the demise of Carillion, the spotlight has again fallen on the fees paid to auditors and whether firms, such as KPMG, Carillion’s auditor, are truly serving the public interest. MPs from the Work and Pensions and Business, Energy & Industrial Strategy (BEIS) select committees investigating the collapse of Carillion questioned representatives from KPMG and Deloitte, Carillion’s internal auditor, on this issue recently.

Rachel Reeves, chair of the BEIS select committee, asked if the four firms should be broken up. Michael Jones, internal audit partner, at Deloitte said: “I have worked for Deloitte or its predecessor firms for over 30 years and have been a partner for over 20 years?  I can tell you it does not feel like a cosy club when we are pitching against each other for work.  I understand the point about these very large audits, these FTSE 100 audits that are predominantly just audited by the big four, but in other parts of our work we compete with many people, whether it is PA Consulting or McKinsey, or in my line of work, where I compete with much smaller firms as well.”

MP Heidi Allen of the work and pensions committee  asked: “In a country and a world where the average person is becoming increasingly distrustful of big organisations that do not appear to have their interests at heart, or they are the last people who they worry about—not every large organisation is like that, of course—they will look at Carillion, and they will look at a huge blue‑chip auditor like KPMG or Deloitte, and think, “These people just do a job, but they do not care about what happens to me”.  What needs to change in the system?  I am hearing from all of you, “We did our job within the rules.  Within the parameters, we did our job”.  What needs to change in the system, so that something like this does not happen again?”

Micheal Hinchliffe, head of audit, KPMG, said: “From my perspective, what you have highlighted is an expectation gap from an external audit perspective of what an audit is and what the public expects from an audit.  As we have said, the audit is an opinion on whether the financial statements give a true and fair view.  It is clear the public expects that there is more around that.  An audit is not a guarantee that a company will not fail.  Companies will fail and it does not mean that management made the wrong decision.”

He added: “From an external audit perspective, perhaps an audit needs to do more.  Perhaps an audit needs to provide a more ongoing assessment of the risks within the business, not at a 12-month snapshot.  Perhaps an audit needs to provide more qualitative analysis on decisions made by management.  Within the current framework that simply is not what an audit is or what we are required to do.  To change that requires a change in regulation; it requires investors to agree that this is worthwhile because there is a cost involved in that.  To me, there is clearly this expectation gap.”

The select committees’ inquiry has also published Carillion board meeting minutes that showed Emma Mercer, finance director (FD) at the time of the collapse, and prior to that FD of construction services in the UK,  Carillion board meetings upon her return from Canada and just six weeks into her role in the UK raised concerns about the accounts she found – or “whistle-blowing” as it is described in the minutes. The committee has now written to Mercer with additional questions about this.

Frank Field MP, chair of the work and pensions committee, said: “Emma Mercer took just six weeks to spot and pull the thread that began the entire company unravelling. That the next chief financial officer had to go through whistleblowing procedures to get her concerns about accounting irregularities taken seriously by the Carillion board is extraordinary. So too is that the board’s response was to reject an independent review and get KPMG, their pet rubber-stampers, to mark their own homework.

While our witnesses have been reticent in oral testimony, these minutes begin to reveal the true picture of a company falling apart at the seams in full view of the board and their auditors.”

Last Updated: 2 March 2018
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