The 'Big Four’ audit firms have been accused of a serious breach in alignment with shareholder interests as the Competition Commission reveals the findings of its landmark investigation into their dominance.
The wachdog, in a report published on Friday, chastised PwC, Ernst & Young, Deloitte and KPMG, for a deep “misalignment” with shareholder interests. The Commission made clear that auditors are accountable to shareholders first and foremost, but claimed that in many instances, auditors and company executives have acted as a cabal to their mutual benefit, and to the exclusion of the interests of investors.
The investigation contended that the relationship between auditors and management has been too cosy and needs to be overhauled.
It also unearthed that standard contracts for auditing loan agreements include 'Big Four only' clauses, restricting choice to only the largest providers, and that while the stipulation is optional, it is often adopted without amendment.
As part of its remedy, the Commission demanded that auditors work harder to create transparency and openness with shareholders. Shareholders could become more involved in choosing auditors, who could be asked to give presentations at company annual meetings.
Other remedies outlined by the regulator include mandatory rotation and tendering, which means that firms will have to step down as auditor after a fixed period of time and companies will be forced to ask new auditors to compete for business. The Commission also recommended a ban on contractual clauses limiting choice to the Big Four firms.
Although the four firms have dodged an out and out break-up, the remedies, along with the language of the report, are likely to cause waves in the industry.
The Big Four audit almost 90pc of all blue chip companies and according to a House of Lords investigation, listed companies use the same accountant for an average of 48 years. The auditors, who dispute this figure, were heavily criticised for failing to raise the alarm in the lead up to the financial crisis.
European regulators have also been working on plans to radically reform the audit landscape. However, it appears calls for the most sweeping reforms, such as separating audit and non-audit practices or imposing limits on market share, have been ignored.
The Commission will hold a four-month consultation to discuss the proposed remedies.