Deloitte’s FTSE350 proposed cap would present mid-tier firms with audit opportunity

Deloitte's FTSE350 proposed cap would present mid-tier firms with audit opportunity

This latest suggestion from Deloitte, if implemented by the government, would see the Big Four each restricted to 20 per cent of FTSE 350 market. This proposal would open the market up for mid-tier firms to service more FTSE 350 companies, in which all but 13 are currently audited by Big Four firms.

Deloitte’s FTSE350 proposed cap would present mid-tier firms with audit opportunity

Big four firm Deloitte has asked the UK government whether it could impose a cap on the number of large listed companies Big Four firms can audit to prevent greater regulatory intervention.

The suggestion comes as the Big Four firms – Deloitte, PwC, EY and KPMG and the wider audit market – is coming under intense scrutiny, and if implemented by the government would present an opportunity for mid-tier firms to move into the FTSE350 audit market.

A string of scandals has led the Competition and Markets Authority (CMA), the UK’s competition watchdog, to recommend joint auditing. This would require large listed businesses to be audited by both a Big Four firm and a smaller rival. Companies would be exempt from this requirement if they were to hire a mid-tier firm as their only auditor.

Others, like Labour party MP Rachael Reeves, have more extreme suggestions. She believes that the only way to see reform in the market is to break up the Big Four, separating their audit businesses from their other professional service divisions.

Big-Four working to avoid forced joint audit with mid-tier firms

Unsurprisingly, this is not something the Big Four want to happen, which has led to the firms suggesting alternative intervention in an attempt to curtail any major regulation imposed by the government.

Stephen Griggs, Deloitte’s UK Managing Partner Audit & Assurance said: “There are measures where we have concern – Joint Audits with Challenger Firms and Operational Separation – which we believe will not achieve the CMA’s objectives.

“At a time of extreme change in the audit profession and in a period of profound national uncertainty they will place major new regulatory burdens on UK businesses, damage audit quality and represent an untested experiment that could weaken the UK’s competitiveness.

“We are [also] looking at voluntary measures to meet the CMA’s objectives and have raised these with BEIS.  We are very conscious in considering any such measures and their implementation that we act consistently with all our legal obligations, including with respect to competition law.”

This latest suggestion from Deloitte, if implemented by the government, would see the Big Four each restricted to 20 per cent of FTSE 350 market. This proposal would open the market up for mid-tier firms to service more FTSE 350 companies, in which all but 13 are currently audited by Big Four firms.

“The biggest threat of all is no change”

However, if the Big Four firms were to each take 20% of the market, that would still only leave the last 20% for mid-tier firms to compete over. While this is a larger share than these firms currently have, it would still see the Big Four firms dominating the market.

Despite this, a cap on the number of companies that the Big Four can audit is seen as a preference for some, which is the case for Scott Knight, head of audit at mid-tier firm BDO, who said: “It’s a practical solution which would open up the market more quickly and bring greater market resilience than any other measure.

“However, we believe the audit profession has a duty to implement whatever market reforms are finally approved with a sense of urgency for the benefit of UK plc. We therefore support joint audits as part of a wider package of measures – including a clear demarcation between audit and non-audit services, and enhanced regulatory oversight by a beefed-up watchdog. The biggest threat of all is no change.”

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