By Huw Jones
LONDON (Reuters) – Britain’s business ministry will consult further on sweeping reforms of the audit market, it told Reuters, stopping short of legislation demanded by lawmakers.
Last month the Competition and Markets Authority proposed some of the biggest reforms to auditing globally since the aftermath of the Enron scandal, recommending new laws to force the so-called Big Four firms to separate their audit and consulting arms and requiring most listed companies to be audited by two different firms.
Business minister Greg Clark had told parliament he would bring forward the legislation needed to implement the reforms before the end of this year, though a slot was needed in parliament’s Brexit-clogged calendar.
Now the ministry has told Reuters that, while still committed to reforming the industry, it plans to consult further before considering any new laws.
“We will publicly consult on any proposed changes,” it told Reuters.
The reforms involve major change for the Big Four of EY, KPMG, Deloitte and PwC in Britain and come in the wake of the collapse of companies including construction group Carillion and retailer BHS, where auditors were criticised for not spotting looming problems.
The big accounting firms have lobbied strongly against the proposals, arguing they won’t necessarily raise audit standards.
Now it looks like they will either have more time to influence the new rules or possibly not face any new legislation at all.
With Britain’s departure from the European Union clogging up parliament, the ministry might ask the sector to change its practices voluntarily, industry officials said.
“With the legislative focus on Brexit, the government could seek undertakings from the Big Four to voluntarily adopt some of its preferred measures rather than wait for a slot in the parliamentary calendar to become available,” said Michael Izza, chief executive of the ICAEW professional accounting body.
A Big Four source said they now expect the government to look at voluntary changes because legislation could take until 2021 to come into effect, with a general election also likely between now and then.
Parliament’s business committee has said it wants change fast and its members could view voluntary changes instead of legislation as a fudge.
“I hope the government will rise to this challenge and resist the urge to kick audit reforms into the long grass,” the committee’s chair, Rachel Reeves, told Reuters
KPMG’s UK arm, which audited Carillion, announced last week that there will be more separate performance management and governance of the audit business from June — steps that fall short of the full operational split proposed by the CMA.
KPMG said it was looking closely at how it might introduce further measures in coming months. PwC, which audited BHS, said it was also taking steps to strengthen its governance and enhance audit quality.
EY declined to comment and Deloitte had no immediate comment on whether it would take pre-emptive action.
The government could also ask the Big Four to voluntarily divest a number of their audits, ICAEW’s Izza said, making room for smaller accounting firms such as BDO, Grant Thornton and Mazars to pick up more book-keeping work among blue-chip clients.
The Big Four source said that voluntarily agreeing not to take on audits could be in breach of European Union competition law.
(Reporting by Huw Jones; Editing by David Goodman)