Break up Big Four auditors: MPs call for overhaul following Carillion, BHS and other collapses they failed to spot
Major accountants are beyond saving after a string of scandals and must be broken up to restore the profession’s shattered reputation, a report has warned.
The so-called Big Four firms are hopelessly conflicted because their consultancy arms earn huge fees from the companies they are meant to scrutinise, according to MPs on the Business Select Committee.
The MPs claim this makes it impossible for staff in the businesses’ audit arms to offer truly independent oversight of a client’s books.
Talking tough: Labour MP Rachel Reeves is chairman of the Business Select Committee
As a result, they call for KPMG, PwC, Deloitte and Ernst & Young to each split up into two businesses – an audit firm and a consultant.
The Big Four missed the impending collapse of outsourcer Carillion, failed bank HBOS and department store BHS. Labour MP Rachel Reeves, chairman of the committee, said: ‘For the big firms, audits seem too often to be the route to milking the cash-cow of consultancy business.’
The Big Four earned four times as much from consultancy fees than from audit last year, the committee found.
Partners at the firms get a share of their profits worth hundreds of thousands of pounds a year.
The firms have argued that a full split would push up audit costs, make it harder to recruit good staff and reduce the quality of bookkeeping, because at present auditors can talk to colleagues who are consultants with detailed knowledge of particular areas.
But Reeves said: ‘Change is needed to deliver for investors, workers and the public.
‘The Big Four may not like it, they may seek to undermine the case for reform, but vested interests should not be allowed to get in the way of positive change.
‘We must not wait for the next corporate collapse.’
All four auditors worked for Carillion before it failed, throwing 19,500 jobs into doubt and leaving vital contracts with schools and hospitals in danger of collapsing.
The MPs said Carillion should have been ordered by its auditors to rein in payments to shareholders before it called in administrators at the start of last year after running out of cash. Instead, the outsourcer paid £333m more in dividends than it earned in profits in the five-and-a-half years to June 2017.
Similarly Capita was allowed to pay £211m in 2017 before begging shareholders for a £700m rescue months later.
David Dunckley, boss of second-division auditor Grant Thornton, was criticised by the committee because his business failed to spot an alleged £40m fraud at cake chain Patisserie Valerie which has seen finance director Chris Marsh arrested.
Dunckley claimed that detecting fraud was not an auditor’s job, comments that disappointed the MPs.
Meanwhile, the industry’s regulator, the Financial Reporting Council, is being disbanded and replaced after failing to do its job properly.