Accountancy firms may face reforms in UK amid scandals

Source:Xinhua Published: 2018/12/19 9:33:50

The UK audit sector may face overhaul following the controversial role of auditors in major corporate failures, two government-backed reports suggested on Tuesday.

The Big Four audit firms in the UK, Ernst & Young (EY), Deloitte, KPMG and PricewaterhouseCoopers (PwC), have come under criticism for focusing more on generating revenue from offering consulting services than the quality of auditing, especially with KPMG being accused of being "complicit" in the run-up to the collapse of Construction giant Carillion.

"The companies should do structural break-up by splitting audit and advisory businesses. To get higher quality, auditors should focus exclusively on audit, not on also selling consulting services," said the Competition and Markets Authority (CMA), the UK's primary competition and consumer authority.

To encourage competition, the audits of the UK's biggest companies (FTSE 350) should be carried out by at least two firms, at least one of which would be from outside the Big Four, the CMA recommended when proposing changes to legislation to improve the audit sector.

"This will give mid-tier firms access to the largest clients, allowing them to develop their experience and credibility, while also ensuring a cross-check on quality," the CMA said.

The CMA has identified a number of reasons for unsatisfactory auditing quality, such as companies' tendency to choose auditors on the basis of "cultural fit" or "chemistry" rather than those who offer the toughest scrutiny.

Another reason is limited choice, with the Big Four conducting 97 percent of the audits of the biggest companies and that their focus on quality appears diluted as at least 75 percent of their revenue comes from other services like consulting.

An independent review by John Kingman, the former Treasury mandarin, into the role of the Financial Reporting Council (FRC), recommended to government that the FRC be replaced with a new independent regulator with clear statutory powers and objectives.

Also on Tuesday, Donald Brydon, outgoing Chair of the London Stock Exchange Group, was appointed to lead a new government-commissioned review into the UK audit standards, which will build on the findings of these two reviews.

Business Secretary Greg Clark said: "Audit companies need to learn the recent lessons from high profile audit failures and reform to regain public confidence, or they will be forced to do it."

Commenting on the CMA audit proposals, Kevin Ellis, chairman and senior partner of PwC UK, said: "We recognize it is time for change and a watershed moment for the audit sector. Audit quality must be front and centre of any reform. We support measures which strengthen audit quality, boost public confidence and encourage more choice in the market."

Posted in: EUROPE

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