Big Four face revolution in audit industry

BRITAIN’S Big Four audi- tors have just three months to outline how they will break up their businesses after a string of scandals.

The accounting watchdog has told Ey, PWC, kPMG and Deloitte they must submit plans by October on how they will split their audit arms from their consulting businesses.

It comes after the major accountancy firms were accused of poor practice and conflicts of interest, following their oversight of a number of corporate failures, including Wirecard, Carillion, Thomas Cook and BHS.

The incidents prompted a series of reviews into the auditing industry, which eventually resulted in a recommendation to break up the heavy-hitting Big Four.

The orders from the Financial Reporting Council (FRC) to push ahead with the splits mark the first major shake-up of the accounting industry in decades. Sir Jon Thompson, the watchdog’s chief executive, said 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’.

For investors and customers, auditing is arguably the most important job the Big Four firms undertake. Many shareholders rely on an auditor to flag concerns about the company’s finances – though in cases such as Wirecard and Thomas Cook, where the parlous state of their balance sheets remained unnoticed until shortly before their collapse, this proved unreliable.

However, the Big Four only make around a fifth of their money from audit work, while rapidly expanding their lucrative consulting practices.

This has led to critics claiming that auditors ‘go easy’ on the companies they assess, due to fears they may lose out on valuable consulting work.

PWC, for example, signed off on Thomas Cook’s accounts for a decade to 2016. During the first four years of that audit contract, it also advised the board on remuneration.

The FRC has outlined a number of principles which firms must abide by when enforcing the split of their divisions. These include paying auditors in line with the profits they make from auditing, separating the finances of the audit division from the rest of the business, and introducing an independent board to oversee the adequacy of the audits.

The FRC has also made clear that auditors ‘should work for the benefit of shareholders of audited entities and wider society; they are not accountable to audited entities’ executive management’.

Just last year, David Dunckley, the chief executive of accounting firm Grant Thornton, told a committee of MPs that auditors ‘are not set up to look for fraud’.

Ey, KPMG, PWC and Deloitte will have until 2024 to actually implement the splits of their businesses.