The City of London. Picture: THINKSTOCK
The City of London. Picture: THINKSTOCK

London - Pressure on the UK’s audit firms mounted as a competition watchdog started investigating the industry a day after another regulator said it was considering banning auditors from doing consulting work for the companies they assess.

In a move that could herald a major shake-up, the Competition and Markets Authority (CMA) said it would look at concerns about statutory audits that were raised in the wake of the collapse of Carillion in January. The probe increases the risk that regulators may threaten to break up the "big four" accounting firms. That investigation will consider whether auditors have little incentive to produce "challenging performance reviews" of companies, which pick their own auditors. It will look at whether Deloitte, KPMG, EY and PricewaterhouseCoopers may be "too big to fail".

"If the many critics of the audit process are right, it is not just the companies which buy audits that lose out; it is the millions of people dependent on savings, pension funds and other investments in those companies whose audits may be defective," the CMA’s chair, Andrew Tyrie, said on Tuesday.

Business Secretary Greg Clark encouraged the CMA to "be ambitious in its thinking and move swiftly".

In a letter to Tyrie on Monday, Clark said he had "concerns about the operation of the market and that the recent events around the collapse of Carillion" and department store BHS Group "have brought this into sharp focus".

It is not the first time that anti-competition regulators have looked at the market power of big audit firms. Just four years ago, authorities ruled that UK corporations must re-tender audits every 10 years. The EU has also threatened to split off auditors’ consulting arms in recent years, before adopting watered-down proposals.

Professor of accounting and finance at the University of Suffolk Atul Shah said he wanted the CMA probe to prompt something "very radical" such as, at a minimum, a break-up of the big four.

"The culture and behaviour needs to radically change," he said, adding that accountancy firms should refuse to take on consultancy work for companies they audited.

KPMG chair and senior partner Bill Michael responded to the probe saying he had "been honest that the industry faces challenges". Head of audit at Deloitte Stephen Griggs said it would be "complex" to put in place "measures that encourage choice as well as a robust audit market". EY and PwC did not immediately comment.

On Monday the Financial Reporting Council, Britain’s accounting regulator, said it was considering banning auditors from doing consulting work for the firms they assess. In June, the council said KPMG’s audit work in the UK was of an unacceptable standard.