Britain to shake up how companies are run and audited

LONDON: Britain proposed weakening the market grip of “Big Four” auditors on Thursday and making company directors responsible for spotting fraud after the collapses of retailer BHS and builder Carillion.

Directors would have to repay bonuses if their company went bust or serious failings came to light, and dividends and bonuses would have to be stopped if firms didn’t have enough cash – a lesson from the Carillion collapse.

The long-awaited proposals, put out to a four-month public consultation, implement the bulk of recommendations made in three government-backed reports on audit market competition, regulation and corporate governance.

 

“It’s clear from large-scale collapses like Thomas Cook, Carillion and BHS that Britain’s audit regime needs to be modernised with a package of sensible, proportionate reforms,” business minister Kwasi Kwarteng said in a statement.

Some of the proposals are already being introduced in voluntary form, such as operational separation of audit and more lucrative consultancy work at PwC, Deloitte, KPMG and EY – the “Big Four” firms that dominate auditing of blue-chip UK companies.

The Financial Reporting Council, criticised by lawmakers for being too timid in regulating auditors, is already undergoing an internal transformation to become the more powerful Audit, Reporting and Governance Authority or ARGA, proposed on Thursday.

The government proposed that smaller audit firms undertake a meaningful portion of a big company audit, stopping short of the joint audit initially recommended by the UK Competition and Markets Authority.

This would help “challengers” like Mazars, Grant Thornton and BDO build up expertise to fully take on the Big Four later on. If this competition strategy fails, the Big Four face caps on market share, the government said.

Mazars said targets of at least 20% of total audit fees at challenger auditors for FTSE-350 companies after five years of reform should be set.