Audit firms step up warnings over watchdog鈥檚 separation plans
Some big four firms are warning that the plans will jeopardise investment in audit quality improvements, Sky News learns.
Monday 15 June 2020 15:33, UK
Some of the big four accountants are intensifying their opposition to regulators鈥� plans to restructure their British operations, warning that the reforms could threaten future investment in their audit businesses.
Sky News has learnt that the quartet are in the process of responding to a Financial Reporting Council (FRC) letter sent last month which informed them that they will be forced to pay partners according to the profits their divisions make on a rolling five-year basis.
The profit-sharing edict forms a central plank of the operational separation blueprint that the FRC has drawn up following more than two years of pressure on the audit firms triggered by a string of prominent failures.
Sources said, however, that at least two of the big four of Deloitte, EY, KPMG and PricewaterhouseCoopers (PwC) were writing to the watchdog to highlight continuing concerns about the plans.
They are said to believe that the absence of cross-subsidy would remove a key incentive to invest in improving audit quality by spending substantial sums on new technology.
The outlier among the quartet appears to be KPMG, which has been the hardest-hit by FRC fines in recent years following scandals at companies such as Ted Baker and the Co-op Bank.
KPMG was also the auditor of Carillion, which collapsed in 2018, sparking calls for urgent reform of the profession.
The firm said that it backs the principle of operational separation, and that it was "determined to help shape the future for an audit profession which acts in the public interest, delivers high quality audits that enhance trust and confidence and supports attractive and successful capital markets".
It added that it was committed to working with the FRC on the changes, and said it had been the first member of the big four to create a separate board of directors for its audit practice.
"Operational separation of the UK's audit firms alone will not address the changes to the corporate landscape demanded by the reviews we have seen over the last two years," a KPMG spokesman said.
"To attain lasting change, this must be part of a broader package of reforms which include clarifying and enhancing the responsibilities of boards, directors and management in respect of corporate entity governance and the success or failure of the enterprise."
Ministers are expected to introduce legislation this year that will trigger far-reaching changes to the way auditors function.
As part of the FRC's reform blueprint, it will demand visibility over the accounts of the firms' audit operations to scrutinise them for possible cross-subsidy.
Its latest move underlines its intention to pursue its reform agenda even as auditors face severe disruption to revenues as a result of the coronavirus crisis.
All of the quartet which dominate the profession have taken steps to conserve cash by deferring promotions, reducing partner payouts and, in some cases, withdrawing job offers during the pandemic.
A spokesman for the regulator said it continued to "move forward with our project to achieve operational separation of audit practices".