Synopsis
The widely awaited overhaul comes after lawmakers and practitioners promised to improve audit quality following a series of high-profile missteps such the collapse of Carillion Plc in 2018 and the BHS Ltd. failure in 2016. All of the major auditors accepted the need to change auditing since then and restructured their audit practices.
The UK will bring in sweeping audit reforms aimed at reining in the dominance of the Big Four accountancy firms and cleaning up the industry following a string of high-profile scandals.
The government said Tuesday that it will replace the Financial Reporting Council with a new watchdog that will be given tougher enforcement powers and be funded by an industry levy.
The widely awaited overhaul comes after lawmakers and practitioners promised to improve audit quality following a series of high-profile missteps such the collapse of Carillion Plc in 2018 and the BHS Ltd. failure in 2016. All of the major auditors accepted the need to change auditing since then and restructured their audit practices.
The Audit, Reporting and Governance Authority will also have the ability to designate large private companies as “public interest entities” to ensure they are more transparent to investors. FTSE 350 firms will also need to conduct some of their audits with a challenger firm to PricewaterhouseCoopers, KPMG, Deloitte and Ernst & Young -- to help nurture more competition.
Missed Opportunity
Despite being generally well-received, the revamp faced some criticism.
The FRC’s chief executive officer, Jon Thompson, said the government’s decision to not introduce a US-style federal law reporting regime is a “missed opportunity.”
Jon Holt, chief executive at KPMG UK, agreed with Thompson about the lack of US-style reforms and said it offers businesses no defined framework for internal control and “risks a pick ’n’ mix approach to reporting and measurement.”
“While we await more details on the measures and clarity around timings, it is an opportunity to further strengthen the UK’s corporate reporting system and drive trust in business,” said Stephen Griggs, a managing partner at Deloitte.
“The detailed response marks a step forward and its significance should not be underestimated,” Hemione Hudson, head of audit at PWC UK, said. EY didn’t immediately respond to a request for comment.
KPMG was fined over £14 million ($17.7 million) over misconduct on major work it carried out for Carillion and data services company Regenersis. The firm has faced ongoing criticism for the quality of its work. It has previously been fined millions of pounds over shoddy audits of companies including Conviviality Plc, Silentnight Group and Ted Baker Plc.
Administrators for NMC Health sued Ernst & Young in the U.K. over claims of negligent auditing spanning six years. Elsewhere Deloitte was penalized £15 million for its audit of Autonomy Corp., and PWC is being probed by the regulator for Greensill Capital and Sanjeev Gupta’s Wyelands Bank.
“This is about trying to reduce the risk as much as we can -- these big unexpected collapses like Carillion and BHS,” Martin Callanan, minister for corporate responsibility, said in an interview. “We also want to reinforce the UK’s reputation with investors who rely on information about the health of these companies and it’s also about trying to restore public trust in big business through transparency and accountability for the people who run and the people who audit these businesses.”
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