Regulators’ plans to overhaul Britain’s audit sector risk unravelling before they get under way after the sixth-biggest accountant told rivals it might not re-enter the market.
Sky News has learnt that Grant Thornton UK’s chief executive told fellow bosses at a meeting this week that the firm had not yet decided whether it would resume tendering for FTSE-350 audit clients in the wake of a key report by the Competition and Markets Authority (CMA).
Senior audit figures and finance chiefs believe the joint audit rule would be “a non-starter” without Grant Thornton’s presence in the market.
Under the CMA’s plans, almost all of Britain’s biggest listed companies – barring limited exceptions for the most complex businesses – would be required to choose a second ‘challenger’ auditor from outside the big four to work alongside their incumbent firm.
BDO and Grant Thornton, the fifth- and sixth-largest audit firms, respectively, would be expected to win substantial chunks of this new work.
However, David Dunckley, who runs Grant Thornton’s UK operations, this week told the bosses of other firms and their industry body, the ICAEW, that it was not certain to tender for new joint audit work.
In a statement, a spokesman for Grant Thornton UK LLP said: “We are reviewing the detail of the CMA’s audit market study conclusions and will respond more fully when we have assessed their implications on our firm.”
The firm pulled out of the market last year, complaining that the odds were stacked against it and other smaller peers.
If Mr Dunckley and his colleagues ultimately elect not to compete for new work, it could hole below the waterline the CMA’s plans to bolster competition in the audit market.
The investment required to build an audit capability of serving major multinational companies mean smaller firms are unlikely to be able to commit to doing so on a significant scale, industry figures believe.
At present, Grant Thornton audits just four FTSE-350 companies, and is facing scrutiny over its supervision of the accounts of Interserve, Patisserie Holdings and Sports Direct International.
The CMA’s plans for overhauling the audit have been variously criticised both for being too extreme and for not going far enough.
The big four auditors – Deloitte, EY, KPMG and PricewaterhouseCoopers – have all hired legal advisers to assess the implications of the CMA’s recommendations.
KPMG has been working with Linklaters for several months on the issue, but is not seeking to oppose the reform proposals, while EY is using Slaughter & May, Deloitte is being advised by Freshfields Bruckhaus Deringer and PwC is working with Norton Rose Fulbright.
However, the possibility of any of them seeking to judicially review plans to force so-called operational separation look remote given the costs and risks associated with such a move, according to insiders.
The CMA’s 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 and Ted Baker, resulting in multimillion pound fines in some cases.
One of the principal objections to radical reforms is that the big four operate on a global basis, and most of the FTSE-350 companies whose accounts they oversee are multinational in nature.
MPs on the business select committee recently went further than the CMA, however, by arguing that full separation was needed.
The CMA’s conclusions came 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 fill 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.
Sir Donald Brydon, a respected City figure, is overseeing a separate review examining the future of corporate auditing.