The U.K. competition regulator called for legislation to cut down the dominance of the Big Four accounting firms, saying that the auditors have shown “no signs of self-correcting.”

The Competition and Markets Authority renewed its demand for the firms to split their operations into separate business units. Stung into action by a series of high-profile corporate failures, the regulator said in its final report that a fragile auditing market could only be fixed with government action.

“Early action will require...