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UK ministers are exploring further scaling back legislation aimed at reforming the audit market as they seek to ease regulation on businesses in a push to boost economic growth.
Ministers overseeing the Audit Reform and Corporate Governance bill have discussed ditching a measure that would force the Big Four accounting firms to share audits of the largest companies with smaller firms, according to four people familiar with the matter.
The move could in effect gut the legislation, which Labour had promised to enact if it won the 2024 general election, while two other principal reforms are also at risk of being watered down or shelved.
The previous Conservative government had proposed mandating shared audits so that UK-registered FTSE 350 companies using a Big Four auditor would have to outsource a “meaningful” portion — or 10-30 per cent — of their audits to challenger firms in a new “minor” role.
The proposal aimed to reduce a reliance on the Big Four — Deloitte, EY, KPMG and PwC — and alleviate concerns about the risk of systemic failure if one firm collapsed. Some 88 per cent of FTSE 350 firms used one of the four in 2023.
It was planned as part of a broader legislative push to strengthen the UK’s audit and corporate governance framework after multiple high-profile corporate and audit failures, including at outsourcer Carillion and retailer BHS.
But most accounting firms have not welcomed the prospect of shared audits, and companies that would be affected by the measure fear it would result in higher fees, according to three of the people familiar with ministers’ discussions.
One government figure confirmed that business secretary Jonathan Reynolds was looking at dropping the shared audit obligation in the bill — a move that would “reduce costs on business” at a time when the government’s priority is economic growth.
The person stressed that a final decision had not been made and that Reynolds was still having conversations with the Financial Reporting Council, the accounting regulator, about the matter.
The Big Four firms are reluctant to share their work, while some challenger accounting firms also oppose the changes. They are concerned that being labelled the “minor” audit partner could limit their ability to secure FTSE 350 audits independently as they expand.
Concerns that shared audits could duplicate work and drive up fees were also behind opposition to the proposal, two of the people said.
Ditching shared audits could leave the bill gutted after two of its other major reforms came under renewed scrutiny.
Proposals to reclassify the largest private companies so that they would be subject tighter regulatory scrutiny are already at risk of being axed, and a second proposal to make non-accountant directors of firms responsible for failure could be watered down.
Reynolds told the Financial Times in 2023 that if Labour won power, it would push through long-delayed reforms to the audit market.
Last year, the government used its first King’s Speech to promise a draft Audit Reform and Corporate Governance bill, which included replacing the current regulator with the more powerful Audit, Reporting and Governance Authority.
But one person familiar with ministers’ discussions with industry said the bill had proven difficult to draft, and could be delayed beyond spring.
Baroness Margaret Ford, chair of the Centre for Public Interest Audit, a lobby group, said she would be “disappointed” if ministers watered down proposals “designed to drive resilience and trusted reporting in the market”.
“If the government is serious about accountability and audit quality, it must ensure this bill delivers the robust changes long promised for the profession,” she said.
The Department for Business and Trade said: “The government wants to ensure there is a resilient and competitive audit market in the UK. It is considering carefully how to achieve that aim.”
