Legal practices set up by the so-called ‘Big Four’ accountants would be split from the firms' auditing business along with other professional services under long awaited shake-up proposals published by the competition watchdog today. The Competition and Markets Authority's (CMA) recommendations echo those of a committee of MPs earlier this month.

In a market study to address what it calls 'serious competition problems' in the UK audit industry, the CMA recommends an 'operational split' at the Big Four: Deloitte, EY, KPMG and PwC. This would require the firms to hive off their auditing business under a separate management, accounts and remuneration and to end profit-sharing between audit and consultancy.

However the report shies away from recommending 'an immediate global structural split' between the firms' audit and other service functions. It states that legislation is needed to address 'the vulnerability of the industry to the loss of one of the Big Four, and the current inadequate choice and competition'.

Each of the Big Four has expanded their legal services clout in recent months. Earlier this year Deloitte announced that it had hired Michael Castle, a former magic circle partner, to head its UK legal arm. In a speech at the end of last year lord chancellor David Gauke said he welcomed the arrival of the Big Four to the legal services market.

The CMA’s proposal follows recommendations by the House of Commons Business, Energy and Industrial Strategy Committee which earlier this month said the CMA should consider separating the two arms.

The CMA, which has been in the process of drawing up recommendations since December last year, said the accountancy regulator the Financial Reporting Council (FRC) should also hold audit committees ‘more vigorously to account’ and that the effects of the proposed changes should be reviewed periodically, in the first instance five years from full implementation. Today’s proposals also recommend mandatory ‘joint audit’ to enable firms outside the Big Four to develop the capacity needed to review companies, and the introduction of statutory regulatory powers to increase accountability of companies’ audit committees.

A review last year also recommended that the FRC be replaced ‘as soon as possible’ with a new independent regulator called the Audit, Reporting and Governance Authority.

Andrew Tyrie, CMA chairman, said: ‘People’s livelihoods, savings and pensions all depend on the auditors’ job being done to a high standard. But too many fall short – more than a quarter of big company audits are considered sub-standard by the regulator. This cannot be allowed to continue.’

The government has said it will respond to the CMA's recommendations within 90 days.