UK proposal could lead to Big Four splitting audit from professional-services arms

The UK’s competition regulator has recommended that the Big Four accounting firms separate their audit businesses and from their other professional-services businesses.

The Competition and Markets Authority (CMA) said that an “operational split” is needed, which could mean that the audit business of Deloitte, EY, KPMG, and PwC will need to be spun off under separate leadership and financial structures. The change would also end profit-sharing between the audit arms of the Big Four and their other professional-services businesses.

A response to the recommendations is expected from the government within three months.

The proposed changes come as the Big Four have expanded their capabilities in legal services. In January, Deloitte hired a senior lawyer from the Magic Circle to lead its legal business in the UK.

The recommendation came from a market study by the CMA, which was looking into what it called “serious competition problems” in the audit industry in the UK. The suggestions are in line with recommendations made earlier this month by the House of Commons Business, Energy and Industrial Strategy Committee.

The report did not go so far as recommending a global structural split between the audit and other service functions of the firms.

The CMA also said that the Financial Reporting Council (FRC), which regulates the accountancy sector, should hold auditing committees “more vigorously to account. It said the effects of the proposed changes should be periodically reviewed, with the first review occurring five years after implementation.

Last year, a review of the FRC recommended its immediate replacement with what is suggested to be called the “Audit, Reporting and Governance Authority.”