We need a regulator with teeth to control the ‘Big Four’ accountancy firms

They mop up a whopping 98 per cent of lucrative industry fees, make a killing on auditing the UK’s largest companies, and offer consulting as well – a combination that compromises their willingness to give clients the hard financial truths they need to hear. It’s time the ‘Big Four’ were given what for, says Chris Blackhurst

KPMG is one of the so-called ‘Big Four’ accountancy firms that between them earned 98 per cent of audit fees from FTSE 350 companies last year (PA Archive)

When he was in his pomp in the House of Commons, Vince Cable used to rail against some aspects of the City. One that especially got his goat was the domination of the “Big Four” accountants. It could not be right, said Cable, that a handful of firms hogged Britain’s top drawer of financial business.

Cable, correctly, would get on his high horse. The big accountants were operating a closed shop – hugely lucrative to those fortunate enough to be inside, but frustrating for those excluded – and causing scandals in which the losers were shareholders, pensioners, employees and suppliers.

The four – KPMG (Klynveld Peat Marwick Goerdeler), EY (Ernst & Young), PwC (PricewaterhouseCoopers) and Deloitte – were responsible for conducting the audits of most of the country’s largest companies. One bone of contention was the way in which the firms would undertake more lucrative consulting for companies they were auditing. In theory, they were meant to be apart, but it was hard to see how a client could receive a critical audit full of qualifications from the auditor if that auditor was also earning a higher sum elsewhere from advising the same company.

Cable did his level best to draw wider attention to the issue, and to get officialdom to take it seriously. The accountants did their part, ironically enough, as embarrassing episodes frequently surfaced. Finally, the Financial Reporting Council (FRC), the accounting watchdog, said it would act. We should have known better, of course, than to expect a decisive shift. This, after all, is not a new problem: it’s dogged the profession and the City for years, so why change now?

Duly slipped out before Christmas, when City and ministerial minds were on gifts, celebratory dinners, parties, and in many cases heading for the ski slopes, the FRC’s latest annual review makes for unimpressive reading. We’re told that the audit market “remains highly concentrated” on the four giants.

We’re informed that a competitive audit market is “essential to rebuild trust and confidence in corporate Britain”.

Yes, but. And there is a but, which is that in 2022, the total audit fees paid by public interest enterprises – jargon for the 1,500 or so UK firms with a turnover of more than £750m – increased by 8 per cent to £1.1bn. The typical price of auditing FTSE 350 companies was also up, by 13 per cent.

So far, so good. Those increases, while chunky, were not out of kilter with inflation at that time. Then came the revelation that the Big Four had earned 98 per cent of those FTSE 350 audit fees.

Wow. Four firms sharing 98 per cent. Though it could be worse; at least it’s not 100 per cent.

The smaller firms outside this self-appointed elite, who spend their lives with noses pressed to the glass, marvelling at the riches inside, are awarded the moniker of “challenger” practices. That might not sound so patronising were there any prospect of them mounting a genuine challenge, but – surprise, surprise – the number of FTSE 350 companies that switched in 2022 from a Big Four member to one of those outside amounted to... two.

Still, that’s progress of sorts: in 2021, it was just one. So that’s a 100 per cent improvement. Yeah, right.

As for that other thorny issue – consulting versus auditing – the FRC reported, well, little that is meaningful. The Big Four continue to make more from consulting than they do from auditing. That’s it. We’ve got to go back to 2001 when this blurring first popped up, as Enron collapsed and Arthur Andersen was advising the US energy giant at the same time as collating and verifying its numbers. Regulators in the US and the UK said they were concerned about the potential conflict.

One outcome of the Enron debacle was the demise of Arthur Andersen itself. But if anyone thought the disappearance of one of their own would force change, they could think again. A series of subsequent collapses on this side of the pond – of Thomas Cook, BHS and Carillion, to name a few – highlighted problems with the auditing of their accounts, giving the lie to any notion of a rush to reform.

Of these, the most egregious case was that of Carillion. It was Britain’s second-largest construction firm, employing 45,000 people and holding hundreds of public sector contracts. Weeks after the accounts were certified by KPMG, Carillion went under with liabilities of £7bn.

The crash, on 15 January 2018, was the biggest in UK corporate history. Building projects were left unfinished, the company pension was left nursing a record deficit, and subcontractors’ bills went unpaid.

Carillion had been causing warning lights to flash for years, as analysts queried accounts that saw directors receive ever greater sums and shareholders rewarded with handsome dividends. Last autumn, shortly before the publication of its annual review, the FRC fined KPMG £21m for making “textbook errors” in its Carillion audits.

That seems a lot, but then it’s just 4 per cent of KPMG’s UK profits in 2022, and is negligible in relation to the £28bn KPMG made worldwide. Neither is it jail.

Six years exactly since Carillion imploded, we’re still waiting for new rules with teeth, and sanctions that genuinely punish. If the FRC won’t or can’t do it, then someone else must. The government must intervene. The Big Four cannot be allowed to remain the Big Four any longer.