The British government on Thursday unveiled proposals to modernize the country’s audit sector after a series of high-profile audit failures.
The proposed reforms would, among other things, dilute the dominance of auditing by the “Big Four” accounting firms, possibly cap their share of FTSE 350 audits, and allow a new regulator, the Audit, Reporting and Governance Authority (ARGA), to require firms to separate their audit and consulting businesses.
The Big Four, which sign off on the accounts of more than 95% of the U.K.’s 350 largest listed companies, have been under scrutiny since the collapse of government contractor Carillion, which had been audited by KPMG for 19 years.
“When big companies go bust, the effects are felt far and wide with job losses and the British taxpayer picking up the tab,” Britain’s business minister Kwasi Kwarteng said in a news release. “It’s clear from large-scale collapses like Thomas Cook, Carillion, and BHS that Britain’s audit regime needs to be modernized with a package of sensible, proportionate reforms.”
The Department for Business, Energy & Industrial Strategy will consult for 16 weeks with stakeholders about the reforms, which follow several reports on the functioning of the U.K. audit sector.
Sir Donald Brydon, the author of one of the reports, said the new proposals would help to “restore trust” and that similar measures had worked in the U.S.
The department said the proposal to bring smaller firms in on audits would water down “the supremacy of big-name auditors that put markets at risk whilst boosting jobs and growth of smaller audit firms across the country” and that splitting up audit and non-audit functions would “reduce the risk of any conflicts of interest that may affect the standard of audit” the Big Four provide.
ARGA would replace the Financial Reporting Council, which has been criticized by lawmakers for being too timid in regulating auditors.
On the issuer side, the government is seeking to make directors of the country’s biggest companies more accountable if they have been negligent in their duties, imposing fines or suspensions in the most serious cases of failings.