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FRC calls for the break-up of Audit and Non-Audit Services of the Big 4

Posted by Callum MacRae

The new chairman of the Financial Reporting Council (FRC) has called on the government to enforce the separation of audit and consulting at the Big 4 accounting firms. Simon Dingemans, who started at the FRC in October told the Financial Times that breaking up Deloitte, EYKPMG and PwC was a “critical” measure to improve the quality of their audits.

Simon Dingemans, who formerly worked at Goldman Sachs and GSK, replaced the FRC’s former management team last month and has advised the government that they should get involved to make this split of services within accounting a legislative change. This separation of audit and consulting within accountancy firms was first proposed in April by the Competition and Markets Authority (CMA), who were clear that auditors should focus exclusively on audit to secure higher quality, and not also on selling consulting services. They proposed that separation would achieve this by:

  • Creating a strong audit culture in the firm and eliminating tensions with the very different culture of advisory services

  • Enhancing transparency

  • Making audit truly independent by ending the subsidies from the rest of the firm

  • “Demonstrating a culture of quality, independence and objectivity” and eliminating “undue influence from the wider (non-audit) business”

This has been resisted by the Big 4 as well as mid-tier firms across the industry. They have argued that the CMA’s recommendation to split non-audit and audit services into separate entities would challenge the firms’ resilience. Earlier this year, leading figures from each of the Big 4 were questioned by MPs on the Business, Energy and Industrial Strategy (BEIS) committee on the future of audit and their views on the recommendations of the CMA. David Sproul of Deloitte argued that if audit services were made to be a separate entity and split from consulting services it would put the accounting firms at stake. As detailed by Accountancy Daily, this is because audit fees only form 20% of firms’ overall fee income, meaning the separate entity would not have the 80% from non-audit services to make it robust and able to stand alone without the multidisciplinary practice behind it.

Mid-tier firms including BDO, Grant Thornton and Mazars have also expressed their reservations of an audit and non-audit split with concerns that if the rule was extended to challenger firms, they would be left with insufficient profits to invest to compete with the Big 4. Scott Knight, Head of Audit at BDO said “legal separation undermines the viability of audit and non-audit practice”. There are also fees to consider - with a separation of audit and consulting services, fees are likely to rise across the industry.

However, there would be some positives that could come from this separation. A split should drive quality forward as people will have one sole focus, whether this is audit or non-audit services. As well as this, the audit entity could be run entirely by auditors, whereas currently, only around 25% of people at audit practices are from an audit background.

The CMA has also proposed mandatory joint auditing in the UK, where one firm is the Big 4 and one if mid-tier or smaller, which has been denounced by both the FRC and the Big 4. Dingemans has said that “joint audits lead to duplications, confusion of responsibility and extra costs for no obvious added value”, and Bill Michael of KPMG has agreed that although a joint audit would provide another pair of eyes, in reality, it would be very difficult to implement.

For more information on this article, contact Callum MacRae on 020 7269 6369 or



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