The UK audit regulator on Thursday outlined plans to break-up the big four accounting firms in letters sent to the leaders of Deloitte, EY, KPMG and PwC.
In what would amount to a far-reaching shake-up of the accounting industry, the Financial Reporting Council issued guidelines for the big four to separate their audit and consulting operations in Britain.
The move comes almost a year after the competition watchdog recommended that the government legislate to force the firms to split audit from consulting roles amid concerns about their dominance and conflicts of interest in the scandal-hit industry.
But with no signs of imminent legislation from ministers, the FRC is pressing the firms to embark on a voluntary break up as part of efforts to improve the quality in auditing.
The FRC wants the firms to make their audit operations financially independent businesses, with separate boards led by independent chairs.
It said there should be a ringfencing of audit costs and profits, and the partners in these businesses should no longer be remunerated from a shared pool of earnings that involved firms’ consultants or tax advisers.
The regulator is, through a consultation, giving the firms the opportunity to implement its proposals.
The FRC is due to be replaced by a stronger regulator called the Audit, Reporting and Governance Authority, which is expected to have powers to force a break-up of the big four.
Claire Lindridge, director of audit firm monitoring and supervision at the FRC, said: “We expect the firms to put in place independent governance for the audit practice and ensure that the audit practice is appropriately ringfenced from the rest of the firm so that financial results are clear and transparent.”
A spokesperson for the regulator said: “It does not look like we are going to get any legislation any time soon, so we are moving ahead under our own steam to push firms to make suitable changes to ensure sustainability and transparency in audit.”
The UK’s largest accounting firms have come under pressure after high-profile auditing failures, including the collapses of BHS, Carillion and Thomas Cook. The big four firms audit almost all of the UK’s 350 largest listed companies.
But the government has shown signs its appetite for a quick, sweeping reform of the accounting industry is a waning.
Minister have not yet made final decisions on sector changes that were recommended in reviews for the Competition and Markets Authority by John Kingman and Donald Brydon.
The business department said this month it would next outline its plans on audit reform by April.
EY said it was reviewing the FRC’s proposals and their implications. “While the detail of these proposals is still to be established, careful consideration will need to be given to the impact on audit quality, attractiveness of the profession, resilience and financial stability,” said a spokesperson.
KPMG and Deloitte declined to comment. PwC could not be immediately reached.