The UK’s dominant accounting firms must separate their audit units from other operations by June 2024 as the country’s industry watchdog reacts to shortcomings that led to the collapse of several companies.
Britain’s Financial Reporting Council is asking the so-called Big Four - KPMG, Deloitte, PwC, and Ernst & Young - to agree to operational separation to ensure audit practices don’t rely on “persistent cross-subsidy from the rest of the firm,” it said.
Auditors are under greater scrutiny than ever after a series of high-profile lapses in recent years, with EY’s role in the collapse of German payments provider Wirecard now under the microscope.
In the UK, accountants have been criticised in the wake of companies like Carillion and Patisserie Valerie going bust.
The guidelines seek to prevent accountants from being influenced by other parts of a firm’s business that could divert the focus away from audit quality, the regulator said.
Fixing the conflict of interest is a good first step, said Karthik Ramanna, a professor of public policy at the University of Oxford. But to work, that needs to be bolstered by genuine cultural change within the audit firms -- away from the mindset that auditors are “advisers” to senior executives, he said.
“Junior auditors need to know that their firms will reward and promote them for questioning their clients’ management assumptions,” he said. “Otherwise, it is easy to see how audit firms can be in compliance with the letter of the FRC’s new rules without honouring the spirit.”
The reaction from all of the Big Four to the FRC’s announcement was broadly supportive.
The accounting firms said they were working with the FRC to develop ways for the separation. They’re expected to submit plans by October 23.