UK: The Big Problems

Last Updated: 12 November 2018
Article by John Stittle

The Big Four auditors are coming under increasing amounts of scrutiny over financial reporting standards

It's probably an understatement to highlight that statutory auditors are not having the best of times. Try as they might, the leading firms of auditors just can't escape the continual torrent of bad news. The last decade has witnessed unrelenting criticism aimed at the auditing profession from the FRC, PRA, politicians, the government and, this autumn, the FCA chairman waded in to give auditors yet another kicking. Just how have these accounting firms who act as the audit watchdogs of company financial statements ended up being so unpopular?

Industry domination

The financial statements of listed companies (and many other large companies) are required to be externally audited every year. The FTSE 350 index clearly illustrates the tight grip that the leading international auditing firms have over many companies. Within this FTSE 350 index, between them, PwC, KPMG, E & Y and Deloitte sign off 98% of the financial statements of these companies. Indeed, after the collapse of Andersens – following their involvement in the Enron debacle – the audit market for large companies largely contracted to a choice from only these remaining 'Big Four.'

This small group of large auditors claim that their size means they have the capacity, experience, technical expertise and resources to audit large and major multinational corporations. The prestige and perceived status of having 'a Big Four' signature on an audit report continues to be the major attraction. The lower tier of medium sized auditors find it all but impossible to compete with the elite Big Four auditors and have little more than a token presence in the large company audit market.

Quality control

However, over the last few years, the audit profession has come under increasing attack from all directions. In particular, politicians are becoming concerned that the failure of the Big Four auditors to sound the alarm bells about the financial stability of some leading companies' financial statements. Industry and commercial regulators question whether some of these Big Four firms are always maintaining the highest standards of quality control; there is some evidence of poor adherence to auditing and financial reporting standards.

The Big Four are also often attacked for having a too close audit working relationship with their clients – which may have developed over many years. This relationship is sometimes believed to have the potential to compromise audit objectivity and tarnish independent judgement. Indeed, auditors may be perceived as being hesitant about raising accounting and auditing concerns if this later threatens the loss of additional and more lucrative consultancy work from the same client. Audit fees only represent around a quarter of the total fee income received by a Big Four auditor – so the additional fee income from consultancy forms a major part of their own business model.

"The EU have already attempted to bring more competition by audit rotation into the audit market"

More recently, auditors have been implicated in the failure of a number of high-profile companies. For example, in January this year, the construction contractor Carillion collapsed with questions being asked at to why the auditors failed to raise any concerns in their audit report. Indeed, a subsequent parliamentary inquiry was scathing about Carillion's financial statements audited by KPMG. In another high-profile case involving the collapse of high street retailer BHS, it was reported that the senior PwC auditor who signed off the BHS financial statements, back-dated his audit opinion and spent just two hours working on reviewing the audit file.

Government intervention

For several years, the Big Four have operated under the lurking threat of a referral to the CMA. So, these auditors were not surprised this September by government intervention which might lead to their break-up. The Business Secretary, Greg Clark has now instructed the CMA to carry out a detailed review of the UK audit industry that will investigate competition in the audit market and any conflicts of interests.

In addition, the government and politicians for many years have been dismayed by the lack of intervention by the FRC, the audit regulator, to rigorously investigate and discipline a number of large auditing firms for alleged auditing failures. Under a possible threat to their own existence, the FRC has now begun to exercise its powers more vigorously in response to claims of being too slow, docile and complacent over the years, but the FRC has only sprang into action after its own role and future was put under the spotlight by the government. The FRC has recently became more determined to ensure auditing firms are more vigilant in enforcing auditing and accounting regulations.

Unfortunately, it is now probably too late. After disillusionment with the FRC's lacklustre behaviour, the government has asked Sir John Kingman to conduct a 'root and branch' evaluation of the FRC's governance, impact and powers.

Meanwhile, against this background, the FRC has fought back and issued a particularly damning critical report. In its review of the audit quality of the Big Four, the regulator belatedly warned that these auditors 'must improve the quality of their audits and do so quickly.' Stephen Haddrill, CEO of the FRC, put auditors on notice: they must 'address urgently' issues such as their 'level of challenge and scepticism' particularly with areas such as auditing banks, group accounts and pension balances.

Requirements and restrictions

The EU have already attempted to bring more competition by audit rotation into the audit market. Listed (and many other large) companies are now required to place their statutory audit work out to tender at least once every decade. They are also required to switch auditing firms every 20 years.

In addition, auditors of public interest companies now face further restrictions on the amount of fee income charged for non-audit services such as consultancy or tax advice, but politicians and regulators are now also questioning whether these regulations are strict enough.

On the 10th anniversary of the start of the global banking crisis, another market regulator has recently echoed a number of the FRC and politicians' concerns about the Big Four.

Charles Randell, Chairman of the FCA highlighted that 'most' of the financial institutions in the US and UK that failed (in the banking crisis) were reporting 'robust financial positions right up to the point when they did fail.' Not only did these organisations fail but also their 'financial statements had been signed-off by their boards and large audit firms.'

Likewise, Sam Woods, CEO of the Prudential Regulatory Authority has also highlighted his worries about audit quality – especially for banks.

Other critics of the Big Four suggest that auditors should solely concentrate on auditing and be totally prohibited from engaging in any form of additional consultancy and advisory services. The mid-tier firm, Grant Thornton believe that auditors' independence would be enhanced and possible conflicts of interest avoided if auditors were appointed directly to companies by an independent and specially created public authority or by some form of a public audit commission.

However, time is now short for the FRC and the Big Four to satisfactorily reform. The government's patience with both the FRC and the Big Four is exhausted. Greg Clarke is looking for recommendations from Kingman and the CMA urgently. Both the FRC and the Big Four may soon find themselves facing a very different future and both parties only have themselves to blame for being so unpopular.

John Stittle is senior lecturer at University of Essex

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions