Accounting watchdog launches monitoring crackdown on Big Six firms
The FCA said it has already started monitoring risk reporting, contingency planning and IT security.
The UK’s six largest accounting firms are facing a regulatory crackdown after the watchdog said it would “enhance“ its monitoring of the sector amid growing criticism of auditing failures.
The Financial Reporting Council (FRC) said the move is meant to avoid instability in the financial sector and “systemic deficiencies” in the networks of the sector’s biggest companies – BDO, Deloitte, EY, KPMG, PwC and Grant Thornton.
It plans to focus on “critical” areas including evidence of auditing quality, risk management and controls, financial soundness, values and behaviours as well as leadership and governance.
The watchdog said it had already started work on monitoring risk reporting, contingency planning and IT security across the companies, and plans to report back to the firms on its findings.
The FRC said it will publish individual reports covering the audit quality of each company in June.
The move comes after mounting criticism of the FRC regarding its oversight of the accounting profession following the collapse of construction firm Carillion, with MPs accusing the four biggest firms of “feasting on the carcass” of the outsourcer by collecting more than £70 million in the decade before its demise.
Business Secretary Greg Clark last month called for the FRC to be subjected to an independent review.
The latest measures come a day after the FRC said it was implementing recommendations for tougher sanctions for auditors, accountants and actuaries.
It includes excluding people from the profession for a minimum of 10 years for dishonesty, greater use by the FRC of non-financial penalties and the imposition of sanctions that “reflect the level of co-operation by respondents”.
The work of the Big Six audit firms is core to the integrity and transparency of UK capital markets and so it is vital that the FRC introduces a new approach to monitoring their stability and performance by focusing on aspects of their businesses that are critical to the provision of high quality audit Melanie McLaren, FRC executive director of audit
The most stringent change is an increase in fines to “£10 million or more for seriously poor audit work by a Big Four firm”.
The FRC’s Melanie McLaren said: “The work of the Big Six audit firms is core to the integrity and transparency of UK capital markets and so it is vital that the FRC introduces a new approach to monitoring their stability and performance by focusing on aspects of their businesses that are critical to the provision of high-quality audit.
“We will discuss with firms how well candidates for key leadership and governance roles such as independent non-executives, heads of audit and ethics partners meet our expectations in terms of experience, skills and attributes.
“Where we do not have specific powers in this regard we will look for the firms’ co-operation.”
While Ms McLaren continues to serve in her role as executive director of audit and actuarial regulation, she is one of two board members to have stepped down at the end of March, alongside Paul George.
The FRC said it was part of efforts to diversify its board.
“The FRC has been actively reviewing the board composition to ensure its membership reflects the wider public interest stakeholders we are responsible to as well as investors, business and those we regulate,” the watchdog said.
“Hence recently we appointed Julia Unwin and Jenny Watson, who bring more diverse experience and backgrounds to the board.
“While Melanie McLaren and Paul George have relinquished their board posts they still play key roles in the executive management of the FRC running the operating divisions under their leadership.”