The big four accountancy firms are expected to come under pressure from a new rival following merger talks between BDO and Moore Stephens.

In a move designed to create a fifth firm capable of advising FTSE 100 firms, the new business would be larger than Grant Thornton, which has struggled to break into the lucrative market for advice work with Britain’s top corporations.

Talks between the two sides are understood to be advanced, though it was unclear over the weekend whether both sides would be ready to make an announcement this week.

The news comes at a critical moment for the industry, which has come under increased scrutiny in parliament following a series of scandals at companies such as BHS, Carillion and Patisserie Valerie.

The government called for a comprehensive review of Britain’s auditing industry earlier this year. The business secretary, Greg Clark, said it was “right to learn the lessons and apply them without delay” as he ordered the inquiry into competition within the industry where Deloitte, PwC, Ernst & Young and KPMG audit 98% of the UK’s largest listed companies.

Following Clark’s concerns, the Competition & Markets Authority (CMA), led by former Tory MP Lord (Andrew) Tyrie, began an investigation into quality and choice in the audit market last month.

A separate inquiry has also been launched into the audit industry by the parliamentary business committee, chaired by Labour’s Rachel Reeves.

Reeves has described the market as “broken” and is due to take evidence next month.

The big four have been hit with a series of fines following criticism of their work. The Financial Reporting Council, which oversees the auditing industry, fined PwC £6.5m in June over its auditing of collapsed department store chain BHS.

But the FRC only rebuked KPMG, the auditor of collapsed construction giant Carillion, after finding “a deterioration in the quality of the audits that we inspected to an unacceptable level”.

Accountancy firms have been accused of using their auditing arms as the springboard for lucrative advisory work fees, in breach of conflict of interest rules. The firms have denied any wrongdoing, but have failed to dispel the suspicion that senior audit professionals are compromised by the need to generate advisory income from their clients.

The merger of BDO and Moore Stephens is believed to have been approved by the equity partners in both firms. BDO employs 74,000 people worldwide, including 3,500 in Britain. It reported UK revenues of £456m last year. Moore Stephens has more than 2,000 staff and revenues of £181m. The companies merged their operations in South Africa in 2010.

The combined group would be bigger than Grant Thornton, which had UK revenues of £500m last year.

BDO, whose audit clients include the private equity tycoon Jon Moulton’s Better Capital, is the sixth-biggest accountancy firm by revenues, according to Accountancy Age.

It is led by managing partner Paul Eagland, who has called for a shake-up of the audit market in its submission to the CMA review. It said a cap of 80% should be imposed on the market share of the big four for FTSE 350 audits within three years.

BDO also attacked the FRC as weak, saying the regulator had “done much to undermine public confidence and trust” in the industry.

• This article was amended on 26 November 2018 to correct an overseas/oversees homophone.