The cost of plans to break the dominance of the Big Four accounting firms by forcing the large UK companies to hire two sets of auditors has increased fivefold to about £1bn over 10 years, according to the most delinquent state assessments. The impact of the managed shared audit proposal was put at £210mn last year as part of a public consultation on a long-awaited box of audit and corporate management reforms but has increased sharply after further work by officials, according to four people briefed on the matter.
Under the suggestion, FTSE 350 businesses audited by one of the Big Four — Deloitte, EY, KPMG, and PwC — would be required to hire a smaller firm to carry out up to 30 percent of the work. The policy at increasing the number of players at the top end of the audit market and minimizing disruption if one of the Big Four were to collapse. The quartet currently checks the accounts of 99 of the FTSE 100 and about 87 percent of the mid-cap FTSE 250. The increased costs of about £100mn a year would equate to about 8 percent of the aggregate audit fees paid by the FTSE 350 last year, based on analysis by data provider Audit Analytics.
The bulk of those would bear roughly 150 companies in the FTSE 350 that use a Big Four auditor and have subsidiaries deemed suitable for inspection by a smaller firm. Many accountants expect shared audits to lead to duplication of work and higher fees. The rising cost projections officials have yet to finalize are likely to be seized on by opponents of the reform. Deloitte, EY, and PwC have come out against the proposal KPMG has questioned whether the system would work in practice.
BDO and Grant Thornton, the two larger challengers to the Big Four, have signaled they may prefer to win more FTSE 250 audits than to participate in shared audits. The challenge will be how do you justify this amount so as not go to get a radically different-looking auditory landscape. Senior Big Four partner. The £1bn figure has alarmed supporters of shared audits, which include the Financial Reporting Council, the UK accounting regulator, who worked with the government on the last cost projections. The watchdog expected to challenge the updated figures quite strongly once it provided details of the underpinning assumptions, said one person with knowledge of the process.
The government has already watered down key elements of its proposed overhaul of boardroom rules, developed in response to corporate failures such as those at retailer BHS in 2016, outsourcer Carillion in 2018, and café chain Patisserie Valerie in 2019. In May, pastors settled plans to submit a UK version of the US Sarbanes-Oxley Act requiring directors to sign off on company internal financial controls and scaled back plans to sweep more companies into a tighter regulatory system for so-called public interest entities. The move observed forced us to avoid charging more regulatory fees on trades. The government said contained shared audits were the best path to improving the need but would not remark on the projected costs of the policy until it published a revised impact assessment alongside the draft legislation in due course. It added that the reforms would include a new, strengthened regulator and significantly improve audits and corporate governance in the UK. The FRC said it works closely with the government to progress much-needed reforms.
The cost of plans to break the dominance of the Big Four accounting firms by forcing the large firms to hire two sets of accountants has quintupled to around £1 billion over 10 years, according to the latest government estimates.
The impact of the managed shared audit proposal was assessed at €210m last year during a public consultation on a long-awaited package of audit and corporate governance reforms on the subject.
Under the proposal, FTSE 350 companies audited by any Big Four – Deloitte, EY, KPMG, and PwC – would need to hire a smaller firm to carry out up to 30 percent of the work.
The policy aims to increase the number of players at the top end of the audit market and minimize disruption should one of the Big Four collapse. The quartet currently audits the accounts of 99% of the FTSE 100 and about 87% of the mid-cap FTSE 250.
The increased cost of around £100m a year would represent 8 percent of the total audit fees paid by the FTSE 350 last year, based on analysis by data provider Audit Analytics.
The bulk of this bear by around 150 companies in the FTSE 350 using a Big Four auditor and having subsidiaries eligible for inspection by a smaller company. Many accountants expect that joint audits would lead to duplication and higher fees.
The rising cost forecasts, which officials have yet to finalize, are likely to be picked up by opponents of the reform.
Deloitte, EY, and PwC have opposed the proposal, while KPMG has questioned whether the system would work in practice. BDO and Grant Thornton, the Big Four two big challengers, have signaled that they might prefer to win more FTSE 250 audits individually than participate in the number of joint audits.
A senior Big Four partner said the challenge is how to justify that cost if not going to get a completely different-looking accountancy landscape.
The £1bn figure has alarmed advocates of joint audits, including the Financial Reporting Council, the UK accounting authority which worked with the government on last year’s cost forecasts. The watchdog expected to question the updated figures quite strongly once details of the underlying assumptions were present to him, a person with knowledge of the process said.
The government has already watered down key elements of its proposed overhaul of board rules developed in response to corporate failures such as that of retailer BHS in 2016, outsourcer Carillion in 2018, and cafe chain Patisserie Valerie in 2019.
In May minister scrapped plans to introduce a UK version of the US Sarbanes-Oxley Act requiring directors to sign off on the company’s internal financial control and rolled back plans to bring more companies under a stricter regime regulation for so-called public interest entities. The move followed pressure not to impose additional regulatory costs on companies.
The government said managed shared audits were the best approach to reforming the market but would not comment on the projected cost of the policy until it published a revised impact assessment alongside the bill in due course.
It added that the broader reforms would include a new, strengthened regulator and significantly improve auditing and corporate governance in the UK. The FRC said it works closely with the government to advance much-needed reforms.
