The Queen’s Speech is set for 10 May and will outline the government’s proposed policies for the State Opening of Parliament. Proposing bills spanning across all sectors, there is concern that the legislation to bring forward audit reforms, first proposed over three years ago, has been dropped from the agenda. Industry expert, Chris Biggs, gives his commentary on why an upgrade in the Financial Reporting Council is essential to break up the monopoly of the Big Four.

Many are urging Business Secretary, Kwasi Kwarteng, to not let Downing Street drop the legislation and delay reform any longer. This follows Kwarteng’s pledge to break up the dominance of Deloitte, PwC, KPMG, and EY in the audit market along with having the directors of each of the Big Four accounting firms make an annual statement about the effectiveness of their internal controls.

A reform is long overdue. Following scandals surrounding Pâtisserie Valerie, Thomas Cook, and Carillion due to conflicting interests arising from current Big Four dominance in the sector, diversification of the sector has been marked by the government as absolutely essential. However, according to government officials, the proposals for reform have been circulated for final sign off, but they warned of further delays to the new rules as there is no guarantee they would be included in the next legislative programme.
The Big Four have previously criticised proposed changes to UK professional services, particularly in their lack of support for shared audit proposals. Leaders amongst the Big Four have said the proposals could result in doubling down on work, increased costs for business, and a failure to improve the standards which were in large part why reform has become so prevalent on the financial secretary’s agenda.

It’s argued that if small to mid-size firms could play more of a role in the sector it would result inimproving standards and removing problematic conflicts of interest in the process.

Chris Biggs, partner at Theta Global Advisors has been leading by example at his firm. Theta provide accounting and consultancy services and deliberately do not audit companies to avoid any conflicts of interest, an approach Chris is keen to see applied across the professional services industry to maintain higher standards in a rapidly changing sector.

“After three years of consultations, it’s crucial that Kwarteng follows through with the corporate and governance audit reforms. After seeing scandal after scandal resulting in losses of thousands of jobs, legislation to upgrade the Financial Reporting Council is critical for it to perform its function as a watchdog for the Big Four.

“The potential issues around this shake up have been made clear but that is no reason to shy away from much needed reform. Possible increased costs and time delays for firms outside of the Big Four performing particularly complex and demanding audits are in some ways to be expected should shared audits be adopted. However, these risks can be managed and mitigated with appropriate structures to facilitate a growth period as these smaller firms gain more experience and resources when working on such projects.

“There have been three independent reviews so far and major failings are still happening with the Big Four’s current monopoly. The proposed legislative reform has certainly re-energised the push, but we need to now see more follow through if the issues are to be solved effectively and for the long-term.

“Independence of the Big Four’s audit and consultancy services is crucial. We cannot risk jeopardising the independence of the audit because of lucrative consultancy services provided to the same client. Almost as important as this is the issue of ‘perception’, the public must have the perception that the audit role is fully independent and impartial at all times, otherwise they will lose confidence in the market.

“At Theta Global Advisors, we do not audit and hence, we are one of the few truly independent accounting advisory firms for non-audit services. Mid-sized firms such as ours that are disrupting the industry in a truly unprecedented manner are seeing great success having worked on major accounts this year. Proposals for shared audits working with the Big Four is just one way we can seamlessly diversify the sector, with mid-sized firms having shown they can take on previously inaccessible large clients throughout the pandemic already. For London to continue as a top choice globally for professional services, it is essential to stay ahead of the curb moving forwards, be that through shared audits or caps on the Big Four’s current monopoly.”