Kwasi Kwarteng has signed off on plans to force FTSE 350 companies to give work to challenger audit firms as the government faces pressure to show it has taken action to prevent corporate scandals before the fourth anniversary of the collapse of Carillion.
The business secretary is seeking a legislative slot in the next parliamentary session to bring forward reforms that would aim to halt KPMG, EY, PwC and Deloitte’s dominance of the accountancy industry. They include forcing FTSE 100 and FTSE 250 companies audited by one of the Big Four firms to appoint a smaller firm to work alongside them, The Times has learnt.
However, as part of Kwarteng’s broader corporate governance agenda he has dropped plans to use legislation to hold company directors personally liable for accounting failures with the threat of fines and bans, after a backlash from businesses. The government will insist, instead, that directors make an annual statement about the effectiveness of their internal controls.
The reforms will be announced in Kwarteng’s response to a consultation on audit and corporate governance reform, which was to be released before Christmas but is now set for January.
Next month will mark four years since the failure of Carillion, the government outsourcer that worked on projects including HS2. The former FTSE 100 company collapsed with £7 billion of liabilities and only £29 million in cash. KPMG, which was paid £29 million to audit Carillion over 19 years, signed off the company’s accounts nine months before its collapse.
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The introduction of “managed shared audits” has faced opposition, with some smaller audit firms warning that they do not have the capacity to take on a share of FTSE 100 audits from larger rivals. The business secretary will reserve the power to cap the market share of a single audit firm if the reforms are not effective.
Kwarteng plans to expand the definition of “public interest entities”, which at present includes large listed companies subject to tougher accounting rules. About 1,000 large private companies, including charities, with at least 500 employees and turnover of at least £500 million will be included in the new definition. Large local authorities will be excluded, unless they have issued bonds or debt.
The new audit regulator, the Audit, Reporting and Governance Authority, which is due to replace the Financial Reporting Council, will be responsible for co-ordinating the regulation of local authority audits, a Whitehall source told The Times.
Michael Izza, chief executive of the Institute of Chartered Accountants in England and Wales, said the anniversary of Carillion was a “real reminder that this is an area that the government promised to legislate on”. He said it “would have been good to see a faster pace on this because this is all about making the UK the most attractive place in the world to do business”.
