Carillion scandal highlights lack of ‘real competitors’ in UK audit
KPMG's settlement of the £1.3bn legal claim highlights longstanding weaknesses in the audit sector, experts say
KPMG's settlement of the £1.3bn legal claim highlights longstanding weaknesses in the audit sector, experts say
The growing lack of competitiveness in the UK audit market has been a key driver in the recent spate of high-profile scandals, including the collapse of Carillion, market participants have said.
The sector’s Big Four firms are “gazumping” the rest of the marketplace in terms of having the capacity to release the most guidance in the sector, in addition to “swallowing up” the majority of a dwindling talent pool, according to Anoop Rehal, partner at mid-market auditor Haines Watts.
“With the combination of those two things, there’s nobody else who can realistically service the top end audits,” he says.
KPMG UK confirmed in a statement on Monday that it has reached a settlement with the liquidators of Carillion to mark the end of a £1.3bn legal claim over alleged misconduct in relation to the construction firm’s 2018 collapse.
The landmark corporate failure saw Carillion amass £7bn of debts and 3,000 job losses, despite having paid out £210m in dividends. KPMG collected £29m for the work.
“I am pleased that we have been able to resolve this claim,” said Jon Holt, chief executive of KPMG UK in Monday’s statement. “Carillion was an extreme and serious corporate failure, and it is important that we all learn the lessons from its collapse.”
But for Rehal, the scandal represents the wider issue of negligence at the top of the market caused by the lack of “real competitors to challenge them”.
“When the top four [audit firms] are responsible for releasing most of the guidance in the sector, what hope does any other firm have? They are almost like the defacto governing body for the accounting industry.”
Rehal goes on to explain that “significantly increasing” cost of running an audit firm is disproportionately affecting the market’s smaller firms, and that this is reflected in the uptick in firms pulling their auditor status in favour of “just completing accounts and outsourcing”.
This is echoed by Gavin Hayes, head of policy and external affairs at the Chartered Institute for Internal Auditors (CIIA), who says there is “no doubt that there are fundamental issues around a lack of competition in the market”, particularly among the economy’s public interest entities (PIEs).
The Big Four currently audit 99 out of the UK’s FTSE 100 and 87% of the FTSE 250. However, the forthcoming overhaul of the UK’s audit and corporate governance framework, ultimately triggered by the collapse of Carillion, will seek to address this overwhelming dominance.
For instance, the overhaul will introduce a ‘managed shared audit’ regime, which will give smaller firms the opportunity to audit a “meaningful proportion” of FTSE 350 audits.
The reforms will also see the formation of ARGA, a new, tougher audit regulator. Considered to be the lynchpin of the reforms, this was first suggested as part of the government-commissioned Kingman Review published in December 2018.
However, industry frustration is mounting amid a series of delays to the proposals, with the original package of reforms having been released for industry consultation nearly two years ago.
“A shake up of the industry is needed in order to drive greater accountability, but for this to be delivered we need the government to bring forwards the audit reform bill without delays, and ensure we have an audit regulator with the statutory powers it needs to do its job properly.”
This is echoed by Haines Watts’ Rehal, who says that a “shake up of the audit industry is needed to create real independence”.
However, Rehal goes on to question the scope for “true independence” among the biggest firms, noting that big audit fees mean attempting to strike a fine balance between independence and client satisfaction.
A solution to this could be to establish segregated roles, such as a relationship partner and a responsible individual (RI) partner, he says.
“How many firms can truly state that they have independence from the client? As long as there is a relationship between the auditor and the financial controller, you could question whether there is truly ever independence.”