Britain’s big four accountancy firms should be broken up in order to loosen their stranglehold on the audit market, a hard-hitting report argues.

Parliament’s Business Committee has ordered the competition watchdog – which will release its final recommendations for market reform shortly – to aim for the “full structural break-up” of KPMG, Deloitte, PwC and EY into audit and non-audit businesses.

The Competition and Markets Authority (CMA) has already proposed an operational split between the two functions, but a new report by MPs argues that going further would prove more effective in “tackling conflicts of interest” and providing the “professional scepticism” needed to deliver high-quality audits.

The role of the dominant big four accountancy giants has come under intense scrutiny recently, sparked by the failures of Carillion and BHS and the ensuing criticism of the accountants charged with auditing their books.

However, the watchdog has so far stopped short of recommending they be broken up.

Committee chairwoman Rachel Reeves said: “For the big firms, audits seem too often to be the route to milking the cash-cow of consultancy business.

“The client relationship, and the conflicts of interest which abound, undermine the professional scepticism needed to deliver reliable, high-quality audits. Splitting audit from non-audit business would be a big step to boosting the culture of challenge needed to deliver high-quality audits.

“We must not wait for the next corporate collapse. Government and regulators need to get on and legislate to deliver these reforms and ensure that audits deliver what businesses, investors, pension-holders and the public expect.”

The Business Committee also sounded the alarm over competition and choice within the sector and recommends a segmented market cap and the use of joint audits for the most complex cases to enable challenger firms to step up.

In addition, it wants to increase the frequency of audit rotations to seven-year non-renewable terms and, should the CMA go ahead with an operational split, a cooling off period of three years, in which non-audit services cannot be offered to a former audit client.

In 2016-17, EY, PwC, KPMG and Deloitte accounted for 97% of FTSE 350 audits and 99% of FTSE 100 audits.

The committee also took aim at Grant Thornton after the under-fire accountancy firm used by collapsed cake chain Patisserie Valerie admitted that auditors do not look for fraud.

Chief executive David Dunckley told MPs that ordinary audits look solely to the past and are not set up to detect fraud.

Grant Thornton is under investigation over its auditing of Patisserie Holdings after a £40 million hole was found in the failed cafe chain’s accounts, with the group’s former finance chief having been arrested on suspicion of fraud.

The MPs’ report insists that the detection of material fraud must continue to be a priority.

It is also calling for a tightening of the UK dividend regime after what it described as the “imprudent payment of dividends” out of optimistically booked profits at Carillion.

A separate review, carried out by Legal & General chairman Sir John Kingman, will lead to the current accountancy watchdog – the Financial Reporting Council (FRC) – being abolished and replaced with the Audit, Reporting and Governance Authority.

Ms Reeves added: “Change in the audit market is long overdue. The reviews from the CMA and Kingman highlight the failings; now we need action.

“The ‘Big Four’s’ dominance has fostered a precarious market which shuts out challengers and delivers audits which investors and the public cannot rely on.

“Our report proposes a range of measures to boost competition, improve the audit product, and ensure that the UK continues to be a world leader in corporate governance.”

Ravender Sembhy is Press Association City Editor.