UK To Force Big Four Firms To Ring Fence Auditing Units

By Glenn Dyer | More Articles by Glenn Dyer

So will Australia and the US follow the UK in telling the world’s four biggest accounting firms to separate their audit businesses from the rest of their operations by 2024?

The four big firms have until October this year to tell the FRC in the UK how they will implement the council’s 22 steps to separation, including remuneration.

The UK Financial Reporting Council has asked — KPMG, Deloitte, PricewaterhouseCoopers, 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.”

The request formalises the proposal revealed on March 1 this year for separation.

It is a coincidence that the latest letter came two weeks after the German financial services company, Wirecard collapsed with billions of dollars of debt including 1.9 billion euros of capital that was never there. The audit of Wirecard was done by Ernest & Young.

Council has issued principles for the operational separation of the audit units of the big four which must outline their plans to implement all 22 of its principles by the end of October, and have completed the measures by June 2024.

It is the first structural revamp of the way the firms operate since a string of reviews prompted by the failure of British outsourcer Carillion two and a half years ago.

The FRC’s new principles require that the firms pay auditors in line with the profits of their audits, separate and ringfence the finances of the audit division with a separate profit and loss account, and introduce an independent audit board to oversee the practice.

The Big Four generate around a 20% of revenues from their audit practices, which have been dwarfed by the rapid expansion of their advisory/consulting divisions in recent years.

The Council’s new requirements are designed to improve audit quality and “audit market resilience” by ensuring that “no material, structural cross-subsidy persists between the audit practice and the rest of the firm”, according to the FRC.

“In pursuing these objectives, we will seek to ensure that audit remains an attractive and reputable profession and increase deserved confidence in audit,” the FRC said in its release

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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