Ministers are reportedly discussing abandoning a key measure of the Audit Reform and Corporate Governance Bill that would mandate Big Four accounting firms (Deloitte, EY, KPMG, and PwC) to share audits of large companies with smaller competitors.

This potential reversal effectively undermines the legislation, which was to fulfil a key policy pledge by the Labour Party. Two other principal reforms are also facing possible dilution or cancellation.

The previously proposed shared audit scheme aimed to decrease reliance on the Big Four, who conducted 88% of FTSE 350 audits in 2023, and mitigate the risk of systemic failure should one of these firms collapse.

Under the plan, FTSE 350 companies using a Big Four auditor would be required to outsource a significant portion (10-30%) of their audits to challenger firms.

However, the proposal has faced opposition from most accounting firms, with affected companies fearing increased fees.

A government source told FT that Business Secretary Jonathan Reynolds is exploring dropping the shared audit obligation to “reduce costs on business”, prioritising economic growth. The source emphasised that a final decision is pending and discussions with the Financial Reporting Council (FRC), the accounting regulator, are ongoing.

Scrapping shared audits could severely weaken the bill, especially as two other major reforms face scrutiny. Proposals to subject large private companies to stricter regulatory oversight are at risk of being abandoned, and a plan to hold non-accountant directors responsible for company failures may be watered down.

Mr Reynolds previously stated Labour’s commitment to implementing long-delayed audit market reforms.

The King’s Speech last year promised a draft Audit Reform and Corporate Governance bill, including replacing the current regulator with the more powerful Audit, Reporting and Governance Authority (ARGA). However, sources indicate drafting difficulties could delay the bill beyond spring.

The Department for Business and Trade stated: “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.”

The Institute of Chartered Accountants of Scotland (ICAS) previously urged the UK government not to view audit and corporate governance reform as the “enemy of economic growth”.