BDO au­dit split likely to see other ac­count­ing firms fol­low­ing suit

The Daily Telegraph - Business - - Business - By

Michael O’Dwyer

THE main chal­lenger to the Big Four ac­count­ing firms is plan­ning to split its au­dit prac­tice from its ad­vi­sory busi­ness to con­vince clients it can match its larger ri­vals on au­dit qual­ity.

BDO, the UK’s fifth largest au­dit firm, is un­der­stood to have in­di­cated to the ac­count­ing watch­dog that it ex­pects to fol­low the Big Four by ringfenc­ing its au­dit busi­ness.

The Fi­nan­cial Re­port­ing Coun­cil last week told the Big Four – Deloitte, EY,

KPMG and PwC – to out­line by Oc­to­ber how they plan to sep­a­rate their au­dit di­vi­sions from their wider busi­ness.

The reg­u­la­tor hopes that split­ting the Big Four’s au­dit prac­tices will al­low their au­di­tors to chal­lenge com­pany di­rec­tors more ro­bustly by in­creas­ing their in­de­pen­dence from the firms’ lu­cra­tive con­sult­ing arms.

Grant Thorn­ton, the UK’s sixth largest au­di­tor, is also pre­par­ing to ringfence its au­dit busi­ness. Fiona Bald­win, the firm’s head of au­dit, wel­comed the in­tro­duc­tion of an op­er­a­tional split for the Big Four. She said: “Whilst we are not re­quired to present our plans for op­er­a­tional sep­a­ra­tion to the reg­u­la­tor in 2020, we are al­ready work­ing on the practicali­ties of adopt­ing the prin­ci­ples, and will con­tinue to en­gage with the FRC, our peo­ple and our clients on the ben­e­fits of the pro­pos­als.”

The push to ringfence au­dit prac­tices fol­lows a string of ac­count­ing scan­dals at the likes of re­tailer BHS, out­sourcer Car­il­lion and cake seller Patis­serie Va­lerie.

The changes do not ap­ply to mid-tier firms, but chal­lengers may feel com­pelled to fol­low suit to con­vince clients that they can pro­vide au­dits of a sim­i­lar qual­ity to the Big Four.

David Rule, ex­ec­u­tive direc­tor of su­per­vi­sion at the FRC, said: “It’s possible smaller firms will em­brace this any­way as a com­pet­i­tive ne­ces­sity.”

The Big Four’s sep­a­ra­tion of au­dit prac­tices is likely to cre­ate a mar­ket norm which chal­lenger firms will have to fol­low in or­der to win cov­eted FTSE 350 au­dit man­dates, sources at chal­lenger firms said. Bob Neate, head of au­dit at Mazars, one of them, said: “I think the mar­ket will be­gin to ex­pect [ringfenced au­dit prac­tices] be­cause when we are pitch­ing against the Big Four for a FTSE 350 au­dit, a smart au­dit com­mit­tee chair would say, ‘Why aren’t you do­ing this if it is deemed to be the right an­swer?’”

The au­dit and con­sult­ing arms of RSM, the other ma­jor chal­lenger, have been legally sep­a­rate en­ti­ties since 2007, and the firm says its au­dit di­vi­sion is al­ready op­er­a­tionally dis­tinct from the rest of the busi­ness.

Reg­u­la­tors have given the Big Four un­til 2024 to com­plete any split, but a se­nior source said BDO ex­pects to move faster, po­ten­tially com­plet­ing its split within a year of de­cid­ing to do it. An Ital­ian man­age­ment con­sul­tancy spun out of Deloitte has ac­quired UK peer Chaucer for £60m, writes Oliver

Gill. It is the big­gest pur­chase to date by BIP, which was founded in 2003 as reg­u­la­tors sought to sever au­di­tors from of­fer­ing more prof­itable con­sult­ing ser­vices af­ter the Par­malat and En­ron ac­count­ing scan­dals.

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