Some of the UK’s biggest auditors will be forced to build a Chinese wall between their audit arm and the rest of the consulting business after a series of high-profile failures in the sector.
Auditing watchdog the Financial Reporting Council (FRC) said that it expects EY, Deloitte, KPMG, Grant Thornton and other auditors to ensure that their audit partners are not rewarded when the rest of the business does well.
It wants no cross-contamination between the companies’ auditors and other parts of the business that may influence the quality of their work.
It is in part an attempt to ensure that a consultancy’s bids for contracts with a company do not impact on the quality of the audit on that company’s accounts.
Today the FRC has delivered a major step in the reform of the audit sectorSir Jon Thompson, of the Financial Reporting Council
“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 United Kingdom,” said the watchdog’s boss, Sir Jon Thompson.
“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. 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.”
The Big Four will now have to present a plan by October to carve out their audit practices before the end of June 2024.
The FRC said it will report on how well firms are doing against a string of objectives every year.
They will need to show the regulator that they are delivering on the outcomes by sending officials financial statements, audit quality indicators, and other information.
Several high-profile company failures have in recent years shone a light on the auditing profession.
Auditors have often been blamed for signing off on accounts that were later discovered to contain serious problems.
Most recently, EY has faced a barrage of criticism after its customer Wirecard collapsed into insolvency.
Wirecard said it had found a 1.9 billion euro (£1.7 billion) hole in it accounts of money that may not exist.
The FRC is also investigating Big Four firm KPMG over more than four years’ worth of audits into outsourcing giant Carillion which collapsed in 2018.
The review was due to be published in January, but has since been delayed.
The FRC said that its requirements on separating audit businesses from other wings of the firms is “world leading”.
It will ensure that auditors are focused on making high quality audits “in the public interest”, it said.
They will also no longer “rely on persistent cross subsidy from the rest of the firm”.
The rules mean, for instance, that while the consultancy and audit arms of a company can share an office, they must both pay their fair share of the rent.