Britain to shake-up audit market after Carillion crash

BRITAIN set out long-awaited plans on Tuesday for a new accounting watchdog to shake up the audit market four years after the collapse of builder Carillion undermined investor trust in company balance sheets.

The government said it would propose draft legislation to rebuild trust in audit, company reporting and corporate governance by increasing choice in a market dominated by EY, KPMG, PwC and Deloitte, known as the “Big Four”.

After Carillion, where 7,000 suppliers and contractors were hit, three government-backed reviews recommended reforms, including replacing the Financial Reporting Council accounting regulator with a more powerful Audit, Reporting and Governance Authority (ARGA).

A draft Bill is issued for consultation before being formally introduced to Parliament, meaning it is not yet clear when it will become law.

The government said the bill will include setting up ARGA, and increase competition through ‘managed shared audits’ for the main listed companies.

For companies audited by one of the Big Four, a smaller ‘challenger’ accountant such as Grant Thornton, BDO or Mazars would audit a minority portion of the company to build up experience in blue chip auditing.

In 2020, every company in the FTSE 100 and 91% of the FTSE 250 were audited by one of Big Four. The plan does not go as far as the mandatory joint auditors sought by Britain’s competition watchdog.

“This will improve the quality and usefulness of audit; and boost resilience, competition, and choice in the audit market,” the government said.

The Bill will also give ARGA “effective powers to enforce director’s financial reporting duties”, meaning a version of the tough US Sarbanes-Oxley Act is now on the table to make top company officials more directly accountable for information given to investors.

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The new law would also give ARGA powers to regulate accountancy - currently done to some extent by private professional accounting bodies - and actuaries.

It will also reform rules for insolvency practioners and strengthen corporate governance of firms going bust to tackle ‘asset stripping’. REUTERS