Watchdog may exempt biggest firms from joint audit rule

Britain's competition watchdog is drawing up plans to exclude some major companies from a controversial new rule that would require many businesses to appoint joint auditors.

Sky News has learnt that the Competition and Markets Authority (CMA) has been weighing whether to offer an exemption as part of its heavily scrutinised inquiry into the audit market.

The CMA is expected to publish its final report this week, but has been stung by a backlash from corporate Britain to proposals outlined in December that would force FTSE-100 companies to employ two audit firms.

Sources close to the regulator's probe say it has floated the idea of offering a "carve-out" from the joint audit rule for "the biggest, most complex companies".

That could apply to banks such as HSBC Holdings and oil companies including BP and Royal Dutch Shell.

The joint audit reform is intended to bolster competition in an audit market dominated by four firms: Deloitte, EY, KPMG and PricewaterhouseCoopers.

However, there is concern about how an exemption from the joint audit requirement might be policed.

One insider said a crude market capitalisation threshold could apply, with companies worth more than a certain threshold allowed to continue with a single auditor.

The workability of this idea was dismissed by corporate chiefs, however, given the potential impact on companies crossing such a threshold in either direction or on multiple occasions.

It was unclear this weekend whether the exemption would be included in the CMA's final report, although one source close to the government said the watchdog had appeared to be determined to press ahead with it several weeks ago.

The CMA is also expected to push for a more robust separation of the big four's audit and non-audit practices than it floated in its preliminary report four months ago.

Its inquiry was launched at the behest of the Department for Business, Energy and Industrial Strategy (BEIS) in the wake of anger about the role of auditors in major corporate scandals at BHS and Carillion.

Accountants have also faced probes into their work on the books of companies such as BT Group, the Co-operative Bank, Ted Baker and Patisserie Holdings.

The big four operate on a global basis, and most of the FTSE-350 companies whose accounts they oversee are multinational in nature.

The CMA has been leaning towards a form of separation that would leave the firms intact but involve creating separate boards of directors for the audit practices of the major accountancy firms.

This has been interpreted by the profession as a form of 'ring-fencing' that the CMA's chairman, Lord Tyrie, was instrumental in pushing through in Britain's banking industry following the 2008 financial crisis.

MPs on the business select committee recently went further, however, arguing that full separation was needed.

The adoption of joint or shared audits, a system used widely in France, would mean a firm from outside the big four being required to work alongside one of the quartet on the accounts of large companies.

The CMA's conclusions will come months after Sir John Kingman, the former Treasury mandarin, criticised the Financial Reporting Council (FRC), the accountancy regulator, and recommended replacing it with a more powerful body.

Directors are now being sought to populate the board of the Audit, Reporting and Governance Authority.

Closer scrutiny of the audit sector has already prompted‎ Deloitte and KPMG to say that they will cease undertaking non-audit work for the FTSE-350 companies whose accounts they supervise.

As the auditor to Carillion, KPMG is facing scrutiny for its oversight of the construction giant, which went bust in January with debts of more than £5bn.

KPMG, whose chairman, Bill Michael, described the sector as "an oligopoly" earlier this year, earned roughly £1.5m annually as Carillion's auditor, with significant sums earned in addition from non-audit work.

Donald Brydon, a respected City figure, is overseeing a separate review examining the future of corporate auditing.

The CMA declined to comment this weekend.