The “big four” accountancy firms of the United Kingdom has been asked by the regulator to make their auditing operations stricter so that there is improvement in oversight of corporate finances. Accounting scandals have in recent years caused collapse of large companies in the country such as the case of Carillion and BHS.
KPMG, PwC, Deloitte and EY should separate their auditing divisions from the rest of their operations by June 2024, directed the industry’s regulator of the UK, the Financial Reporting Council.
There is an ongoing effort to overhaul the accounting profession with the UK government implementing three reviews. However no new legislation has been formed yet. It is amidst this environment that the FRC issued the instruction to the “big four” accounting forms of the UK.
A call for “urgent reform” and recommendations that auditing be treated as a separate profession to accounting was made one of the reviews, led by the City grandee Sir Donald Brydon, which formed the basis of the FRC order.
The perceived inaction on the part of the auditors in the years that resulted in the financial collapses of the retailer BHS and builder and government contract Carillion have been severely criticized and scrutinized in recent years.
There have also been urgent calls from British from MPs to break up the big four accounting firms to enhance the standards of corporate governance.
The new principles have been discussed with the accounting companies, the FRC said, and added that the firms have been instructed to create and place plans for improving their profession by October this year. They include a provision that auditors be protected from influence that could come from the rest of the firm to reduce audit quality.
Previously, the accounting firms have been criticized with questions about whether they have any incentive to not ask difficult questions about the finances of companies that have hired them and were paying for their services.
The FRC also said that the amount of profit distributed to the partners of any one company’s audit practice should not persistently exceed the profits of the division itself.
“Operational separation of audit practices is one element of the FRC’s strategy to improve the quality and effectiveness of corporate reporting and audit in the UK following the Kingman, CMA and Brydon reviews. Today the FRC has delivered a major step in the reform of the audit sector by setting principles for operational separation of audit practices from the rest of the firm,” said the FRC chief executive, Sir Jon Thompson.
“The FRC remains fully committed to the broad suite of reform measures on corporate reporting and audit reform and will introduce further aspects of the reform package over time,” Sir Thompson added.
“Deloitte has been consistent in our support for reform. We remain committed to playing our role in delivering change that embraces audit quality, improves choice and restores trust,” said a Deloitte spokesperson.
“Today’s announcement is an important step towards addressing this but must also be considered alongside a wider package of reform, including in vital areas such as corporate reporting, the role of directors and the regulatory environment in which we operate. While delays are perhaps understandable due to Covid-19, it is crucial that we do not lose momentum,” the accounting form added.
(Adapted from TheGuardian.com)