The Big Four accounting firms — PwC, Deloitte, KPMG and EY — must separate their audit units from the rest of their businesses by 2024, the audit watchdog said this morning. [6 July]
The Financial Reporting Council (FRC) is asking the companies to agree to operational separation by June 2024 to ensure their audits “do not rely on persistent cross subsidy from the rest of the firm”.
Sector tainted by series of scandals
Auditors have come under increased regulatory scrutiny in recent years, with corporate failures at Carillion retailer BHS led to three government-backed reviews that recommended a shake-up of audit.
However the government has not yet introduced legislation mandating change in the sector — partly due to Brexit and more recently, the coronavirus pandemic.
EY’s role in the collapse of Wirecard has also come under the microscope recently. The firm has been accused of failing to carry out standard audit procedure for three years at the disgraced German payments firm.
The FRC had already begun seeking voluntary changes to help speed up reform, and said on Monday it was asking the Big Four firms to agree to operational separation based on a set of principles it has already discussed with them.
Sir Jon Thompson, chief executive of the FRC, said that operational separation of audit was a “major step in the reform of the audit sector”.
“The FRC remains fully committed to the broad suite of reform measures on corporate reporting and audit reform and will introduce further aspects of the reform package over time,” he added.
Firms must submit an implementation plan to the FRC by 23 October this year, for implementation by June 30, 2024 at the latest, the regulator said.
Big Four back watchdog’s plans
All Big Four firms issued statements welcoming the watchdog’s announcement.
A PwC spokesperson said the firm “shares the FRC’s objectives of improved quality and confidence in audit” and “will continue to engage constructively” with the regulator.
Stephen Griggs, Deputy chief executive at Deloitte UK, said: “We welcome this clarity from the FRC on the principles of operational separation and will continue working with them to develop our plans over the coming months.”
EY and KPMG both said they supported the FRC’s plans, but also called for changes to corporate governance in the UK in addition to audit reform.
“As part of the audit profession’s evolution, a holistic package of reforms, including improved director accountability and changes to the scope of audit, is required to deliver effective and sustainable change,” said Hywel Ball, chairman of EY UK.
Jon Holt, head of audit at KPMG UK, called for “an ambitious package of wider reforms across the corporate landscape,” including “clarifying and enhancing the responsibilities of boards, directors and management”.