Watchdog tells Big Four to split audit arms in shake-up
Firms will not have to sell any operations but must make sure they are totally independent
THE Big Four accounting firms have been ordered to split their audit operations from the rest of their business in an effort to boost book-checking quality after a string of scandals.
Deloitte, EY, KPMG and PwC have been warned by the industry watchdog that their split must be complete by June 2024 and that they must outline how it will be achieved by Oct 23 this year. The shake-up – part of the regulator’s wider reform agenda – is one of the most significant the industry has faced and follows three governmentbacked reviews that recommended wide-scale reforms.
Firms will not have to sell any operations but must make sure they are totally independent. It comes after regulators at the Financial Reporting Council issued a record £42m in fines for shoddy audits last year and the industry’s reputation was hit by a slew of corporate failures at the likes of Carillion, BHS, Thomas Cook and Patisserie Valerie, where accountants failed to sound the alarm before disaster struck.
Critics say there is a conflict of interest caused by the Big Four’s lucrative advisory arms, which offer consultancy services and work on corporate deals.
It is claimed this discourages auditors from challenging company directors about their accounts, for fear of missing out on highly paid contracts that are used to subsidise their less profitable audit divisions.
The Big Four welcomed the move, a less severe intervention than the complete split they had previously feared which could have forced them to sell their consulting arms altogether.
The new rules require the finances of audit divisions to be ring-fenced with a separate profit and loss account