UK watchdog wants power to cap Big Four’s FTSE 350 audit clients

The UK’s chief accounting regulator said he has asked ministers to give him the power to cap the number of large listed companies that can be audited by a single firm in a bid to boost competition to the Big Four.

But Sir Jon Thompson, chief executive of the Financial Reporting Council, cast doubt on whether the government would go ahead with legislation to increase directors’ responsibility for the accuracy of financial statements over cost concerns.

The government is expected to publish its updated proposals later this year for the planned overhaul of the audit and governance of large UK companies following a 16-week consultation that ended in July.

The long-delayed reforms were designed to shake up the audit industry and directors’ responsibilities in the wake of a series of accounting scandals at companies including Carillion and BHS.

The consultation included plans to force any FTSE 350 company using one of the Big Four auditors — Deloitte, EY, KPMG or PwC — to appoint a mid-tier firm to audit some of its subsidiaries. The proposal included a reserve power to impose market share caps on the Big Four if the plan failed to improve competition.

But during the consultation the Big Four rejected sharing audits, while smaller rivals also showed little interest.

Instead, some of the firms said they would prefer a cap on market share. This approach was also widely backed by audit committee chairs, Thompson told an event hosted by the Institute of Chartered Accountants in England and Wales on Monday.

He said there was “no one simple solution” to the Big Four’s supremacy and had asked ministers to give the watchdog the powers to impose market share caps and shared audits, which would be used “in an appropriate way, depending on the company concerned.”

Thompson’s comments signal a softening of the regulator’s previous stance. “The worst outcome is for [the reforms] to be killed stone dead because no one can find a middle ground,” said one person with knowledge of the FRC’s position.

Consultation responses showed “considerable support” for changes to areas such as oversight of companies’ audit committees, Thompson said.

But Thompson indicated there was doubt about whether the overhaul would include a rule requiring directors to sign off on companies’ internal controls over financial reporting, which was seen as a key element of the proposed reforms.

He said ministers faced a “key political decision” on whether to proceed with the introduction of the so-called UK Sox requirement, a version of the Sarbanes-Oxley rules put in place by US authorities in 2002 after the Enron scandal.

Thompson said there had been “considerable feedback” on the cost of the new measures, the most significant of which was UK Sox. He said any decision would have to “very carefully” weigh the increased costs against the benefits.

The regulator could act if the government does not introduce legislation in this area through the corporate governance code for listed companies, he added. But companies are not required to comply with the code as long as they explain their reasons.

Hywel Ball, UK chair of EY, said the introduction of Sarbanes-Oxley in the US had shown the “value increase far outweighs the cost of additional regulation.”

The government said no decisions had been taken and that it would “respond to the consultation in due course.”

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