Britain’s big accountancy firms could be banned from earning lucrative consultancy fees at businesses they audit following a series of scandals that have rocked the sector.
The UK’s audit watchdog, the Financial Reporting Council, laid out a series of reforms to tackle what it admitted was the “underlying falling trust in business and the effectiveness of audit”.
It also severely rebuked top firm KPMG, the auditor of collapsed construction giant Carillion, finding “a deterioration in the quality of the audits that we inspected to an unacceptable level”.
KPMG earned about £1.5m a year vouching for Carillion’s accounts, and in March 2017 expressed no concern over reported profits of £150m, even though four months later these proved to be illusory.
In 2017 KPMG earned £200m in audit fees from checking the books of 91 of the 350 biggest quoted companies in the UK, but now faces tougher supervision and inspection by the FRC.
The FRC report lays bare how dependent the “big four” firms – Deloitte, EY, KPMG and PwC – are on the huge fees generated from consultancy work rather than the more humdrum business of auditing.
It said that in 2017, the big four earned a total of £2.1bn from auditing but another £8.4bn from non-audit consultancy. Just over £1bn of that income came from firms they also audited.
The FRC’s proposals echo calls by a parliamentary committee earlier this year, which demanded that the audit arms of accountancy firms should be detached from their consulting services, to avoid conflicts of interest.
The FRC is itself under intense pressure to improve its performance, after being widely criticised as too timid and too close to the firms it is supervising. It is currently the subject of a government review, led by Sir John Kingman, to determine if it is fit for the future.
The FRC said that it would in future “conclude cases more quickly” and increase fines so that financial penalties against auditors “reflect the gravity of the issue”.
In June, PwC was hit with a record £6.5m fine over failings on its audit of retailer BHS two years before its collapse, but the FRC report indicates that future fines could be much higher.
The sector is also braced for a breakup of the dominance of the big four, with calls for the Competition and Market Authority to reopen an investigation.
In a statement referring to the FRC’s criticisms, Michelle Hinchliffe, head of audit at KPMG, said: “We are taking action to address these results. We are investing heavily in our audit business to ensure the highest standards of consistency and rigour are applied across all aspects of our work.”
