The Financial Reporting Council said in a statement Monday that the 4 big companies have until October 23 to present a plan to implement the “operational separation”, which is to be completed by June 2024.
The move is intended to ensure that auditing practices focus on “delivering high-quality audits in the public interest” and are not dependent on financial support from the rest of the company, the FRC said. The guidelines require the audit partners to be paid according to the earnings of their practice, which will have its own governance structure and profit and loss accounts.
An FRC spokesman said Monday’s announcement is not related to Wirecard. The regulator had already planned to publish the guidelines, the result of several independent reviews of the quality and effectiveness of UK audit and reporting, at this time, the spokesperson said.
“Today, the FRC has taken an important step in auditing sector reform,” 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 seek to address concerns that growth in consulting revenue has reduced the focus on audit quality. FRC figures show that audit fees accounted for only around a fifth of Big 4’s £ 10.95 billion ($ 13.7 billion) in combined fee revenue in the UK in 2018.
The guidelines apply only to the Big 4 because they are responsible for more than 95% of FTSE 350 audits, the FRC spokesperson said. Other great players in the UK market include BDO Global and Grant Thornton.
The 4 big companies welcomed the announcement, which they said will help restore confidence in the sector. “Deloitte has been consistent in our support for reform. We remain committed to playing our part in delivering change that encompasses audit quality, improves choice, and restores confidence,” said Stephen Griggs, Deputy Executive Director, Deloitte UK it’s a statement.
The operational separation of UK audit firms is “just the first step on the road to restoring confidence” in UK companies, said KPMG UK chief audit officer Jon Holt. An “ambitious package” of reforms is needed across the corporate landscape, including clarifying directors’ responsibilities for the success or failure of a company, he added.
“We share FRC’s goals of improving audit quality and confidence, market resilience, and the continued attractiveness of the profession as a career, and we are committed to playing our part,” PwC said in a statement. EY did not immediately respond to a request for comment.
Audit failures
Big 4 audit firms have been haunted by a series of corporate accounting scandals around the world in recent years, prompting calls for reform. EU legislation introduced in 2016 restricted the consulting services that auditors could provide to clients, but that did not end supervisory flaws.
KPMG audited family-owned businesses for 14 years, cutting ties in April 2016. Eight partners resigned in 2017 after an internal investigation by KPMG International into the shortcomings of the South African unit. Also in South Africa, Deloitte faced regulatory investigations into its audits of the collapsed furniture retailer, Steinhoff, and the lender Banco Africano.
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