The 4 large accounting firms in the United Kingdom continue to fail. Now they have to change

The Financial Reporting Council said in a statement on Monday that the big four have until October 23 to submit an implementation plan for “operational separation”, which must be completed by June 2024.

The move aims to ensure that audit practices are focused on “performing high quality audits in the public interest” and do not depend on financial support from the rest of the firm, the FRC said. The guidelines require that audit partners be paid based on the benefits of their practice, which will have its own governance structure and its own profit and loss accounts.

A spokesperson for the FRC said Monday’s announcement was not related to Wirecard. The regulator had already planned to publish the guidelines after several independent reviews on the quality and effectiveness of UK business audits and reports at the time, the spokesperson said.

“Today the FRC has taken a major step in reforming the audit industry,” FRC CEO Jon Thompson said in a statement, adding that the regulator plans to introduce “other aspects of the reform package over time. “

The new principles are intended to address concerns that the growth in consulting revenues has reduced the focus on audit quality. FRC figures show that audit fees amounted to only about one fifth of the UK’s 10.95 billion ($ 13.7 billion) Big 4 in 2018.

The guidelines only apply to the Big 4 as they are responsible for more than 95% of the FTSE 350’s audits, said the spokesperson for the FRC. BDO Global and Grant Thornton are other important players in the UK market.

The 4 large companies welcomed this announcement, which they believe will help restore confidence in the sector. “Deloitte has been consistent in supporting reform. We remain committed to playing our part in bringing about change that encompasses audit quality, improves choice and restores confidence,” said Stephen Griggs, Deputy Managing Director of Deloitte UK in a press release.

The operational separation of UK audit firms is “only the first step on the road to rebuilding trust” in British companies, said Jon Holt, chief audit executive at KPMG UK. An “ambitious package” of reforms across the corporate landscape is needed, including clarifying the responsibilities of directors regarding the success or failure of a business, he added.

“We share the FRC’s goals of improving quality and confidence in auditing, market resilience and the continuing attractiveness of the profession as a career, and we are committed to playing our part,” said PwC in a press release. EY did not immediately respond to a request for comment.

Audit failures

In recent years, the four largest audit firms have been plagued by a series of corporate accounting scandals, prompting reforms. EU legislation introduced in 2016 limited the advisory services that auditors could provide to customers, but that did not end the monitoring outages.

In the UK, all four cabinets have been scrutinized by parliamentarians for audits and advisory work Carillion, a construction company that went bankrupt in 2018. KPMG, the company’s external auditor, was investigated by the FRC.

In India, PwC has been banned in 2018 after having audited listed companies for two years after an investigation by the country’s stock market regulator into the collapse of Satyam Computer Services, which revealed that it had falsified its accounts.

In South Africa, KPMG lost dozens of customers after it emerged that the company had failed to detect Widespread corruption involving companies owned by the Gupta family, who revealed emails and used a close personal relationship with President Jacob Zuma to win contracts with the government and loot state coffers. The Gupta family has denied any wrongdoing.

KPMG audited family-owned businesses for 14 years, cutting ties in April 2016. Eight partners resigned in 2017 following an internal investigation by KPMG International on the shortcomings of South African unity. Also in South Africa, Deloitte has faced regulatory surveys on its audits of the collapsed furniture retailer, Steinhoff, and the lender African Bank.

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