Liberal Democrats leader Sir Vince Cable has called for a break-up of the Big Four accounting firms in reaction to concerns raised over the audit of Carillion, the failed building giant.
The Financial Reporting (FRC), which regulates the accounting profession, announced on 29 January it was investigating KPMG’s audit of Carillion.
In an interview with Financial Director, Cable says he is in favour of breaking up accountancy firms PwC, KPMG, EY and Deloitte because of the effect of a lack of market competition on company audits.
It follows last week’s comments from Labour MP Frank Field, chair of the work and pensions committee that is investigating the collapse of Carillion, regarding the possibility of breaking up the Big Four.
“I was rather in favour of that idea,” says Cable. “It was something I tried to get the Competition and Markets Authority (CMA) to look at when I was in coalition government, but they weren’t keen to take it on,” he says.
Cable says that what was put in place instead was a rotation policy for auditors where the same auditor can’t be kept permanently in place.
“I think these [accountancy] firms are for the most part honest and highly competent, but there is this perception regarding Chinese walls- it doesn’t inspire confidence in the wider public. “I think you’ve got to do more and having a more competitive industry is clearly desirable,” he says.
The former chief economist of Shell acknowledges “it’s difficult for a FTSE100 company to be audited by a firm nobody has ever heard of”. But he adds: “I would want the competition authorities to look at the industry with a view to whether there should be a structural remedy- that could involve divestment or breaking up some of the firms,” he says.
In terms of wider corporate governance, Cable says there are a number of areas that could be improved. “There are clearly weaknesses in the system of corporate governance- some of which we tried to deal with in the coalition government and made some progress,” he says.
On corporate pay, Cable says he is in favour of publishing ratios. He says he is also in favour of more worker representation on boards. “I’m also in favour of shareholders being required to publish their voting,” he says. “They’re all ways you can toughen up the system,” he adds.
Regarding diversity, he says that although under his leadership a push took place to get more women on boards, it’s not gone far enough. “We started with ethnic diversity, but again not enough has been done, although there’s a recognition of what needs to be done,” he insists.
On the recent challenges at retail group Bhs and Carillion, Cable says the mechanism of dealing with firms in trouble through the insolvency regime needs to be reconsidered. “It has its strengths, but I think what has now become very clear is that when you have big, complex companies collapsing- enormous amounts of collateral damage is done to good companies.
“We’ve got to find a way of stopping that. I suggested in parliament we look at American Chapter 11-style processes and or a three month moratorium in important cases where instead of automatically going into liquidation you have a pause so you can protect the supply chain,” he adds.
(Full interview in tomorrow’s Finance Director)