Mid-tier firms may even be forced to endure the expense and distraction of splitting their own audit operations from their consulting divisions.
BDO and Grant Thornton, the two biggest challenger firms, are already making preparations for ringfencing to ensure they can credibly compete with the Big Four on auditor independence.
The watchdog wants a more radical overhaul but is fighting with one arm tied behind its back. Faced with parliamentary stasis it had few other options as it cannot compel the firms to take more robust action.
“This is definitely part of a wider package in our view,” says Rule. “The reason we’ve taken this forward is because this is one of the ones where we thought we could make progress ahead of legislation.”
The audit firms also want a broader suite of measures that will increase company directors’ accountability for their numbers. They argue that this US-style regulation would focus minds and align directors’ incentives with auditors that risk losing business if they ask too many difficult questions.
Senior auditors privately accept that it is only a matter of time before another British company joins NMC Health, Thomas Cook, Carillion and BHS, all of which went bust without auditors raising red flags.
“The risk is that if this [reform] gets kicked down the road for whatever reason, then we get another flare up in the future, which sort of reveals that we’ve not really dealt with the issue,” says a senior auditor at one Big Four firm.
Ringfencing on its own is seen by many in the industry as merely papering over the cracks, but if it takes root there is a possibility it could trigger a chain of events that does lead to more meaningful change, says another City audit partner.
“I wonder if it’s the thin end of the wedge, and once you’ve done this then phase two and phase three take you further and further down the path to full separation.”