This is not a time to just reform the Big 4: it is a time to sweep the whole failed structure of UK auditing aside and to start again

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According to the FT this morning:

A UK financial regulator has called for an inquiry into whether the big four accounting firms should be broken up, in a move aimed at ending their dominant position auditing the accounts of Britain’s biggest listed companies.

Stephen Haddrill, chief executive of the Financial Reporting Council that regulates accountants, said Britain’s Competition and Markets Authority should investigate the case for “audit only” firms in an effort to bolster competition and stamp out conflicts of interest in the sector.

They added:

Mr Haddrill’s intervention follows a string of corporate accounting scandals, ranging from Carillion in Britain to Steinhoff in South Africa and Petrobras in Brazil. “There is a loss of confidence in audit and I think that the industry needs to address that urgently,” he said. “In some circles, there is a crisis of confidence.”

The suggestion is one I have little difficulty supporting. It has been apparent for decades that the structure of the Big 4 has created conflicts of interest that have prevented the essential public interest role of acting as auditors from being undertaken either properly more effectively for the benefit of society.

But, the question has to be asked as to why the Financial Reporting Council might be suggesting this now. Might it be because yesterday there was a call from the Local Authority Pension Fund Forum (who I advise, but not on this issue) for the abolition of the FRC. As has been reported:

An influential UK pensions body has called for the country’s accounting watchdog to be wound up and replaced with a proper statutory body.

The Local Authority Pension Fund Forum (LAPFF) – which represents 72 of the UK’s local government pension schemes – made the demand in its submissionto a consultation on the Financial Reporting Council’s (FRC) proposed revisions to the UK Corporate Governance Code.

In its submission, LAPFF said it viewed the positions of the FRC’s chair, Sir Win Bischoff, and chief executive Stephen Haddrill untenable and “considers that the FRC should be put into special measures, to be run by commissioners until a new body is set up under primary legislation”.

Let me be clear: I might support the FRC call for reform of the Big 4, but I have even stronger sympathy with this call from LAPFF, which represents more than 60 local authority pension funds with more than £200 billion under management.

If there is a problem with auditing now it must have taken time to develop. And if so it happened on the watch of the FRC, which is an organisation riddled with membership from the Big 4 creating massive conflicts of interest that are at the heart of the crisis of confidence to which the FRC refer.

This is not a time to just reform the Big 4: it is a time to sweep the whole failed structure of UK auditing aside and to start again.