Business: After the Carillion collapse, the UK will shake up the audit industry

The government said the bill will include setting up ARGA, and increase competition through “managed shared audits” for the main listed companies. For companies audited by one of the Big Four, a smaller “challenger” accountant such as Grant Thornton, BDO or Mazars would audit a minority portion of the company to build up experience in blue chip auditing.

On Tuesday, the United Kingdom announced long-awaited plans for a new accounting watchdog to shake up the audit market, four years after the collapse of builder Carillion shattered investor confidence in firm balance sheets. The government announced it would submit draught legislation to restore faith in audit, corporate reporting, and corporate governance by expanding the market for the “Big Four” firms of EY, KPMG, PwC, and Deloitte. Following Carillion’s collapse, three government-backed assessments suggested reforms, including replacing the Financial Reporting Council accounting regulator with a more robust Audit, Reporting, and Governance Authority (ARGA). Before being formally brought to parliament, a draught bill is released for public comment, therefore it is unclear when it will become law.

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The Institute of Directors said it was a relief the “long overdue” reform was not completely dropped. The ICAEW, a professional accounting body, said the scope of change signalled a missed opportunity.

“There seems to be no chance that this Bill will pass in the forthcoming Parliamentary session, and very little prospect of it doing so in the one after that,” ICAEW Chief Executive Michael Izza said. In 2020, every company in the FTSE 100 and 91% of the FTSE 250 was audited by one of Big Four. The plan does not go as far as the mandatory joint auditors sought by Britain’s competition watchdog.

“This will improve the quality and usefulness of audit; and boost resilience, competition, and choice in the audit market,” the government said. The bill will also give ARGA “effective powers to enforce director’s financial reporting duties”, meaning a version of the tough U.S. Sarbanes-Oxley Act is now on the table to make top company officials more directly accountable for information given to investors.

The new law would also give ARGA powers to regulate accountancy – currently done to some extent by private professional accounting bodies – and actuaries. It will also reform rules for insolvency practitioners and strengthen corporate governance of firms going bust to tackle asset stripping.

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