BRUSSELS • The UK’s dominant accounting firms must separate their audit units from their other operations by June 2024 as the country’s industry watchdog reacts to shortcomings that led to the collapse of several companies.
The Financial Reporting Council (FRC) is asking the so-called Big Four — KPMG, Deloitte, PricewaterhouseCoopers LLC (PwC) and Ernst & Young (EY) — to agree to operational separation to ensure audit practices don’t rely on “persistent cross-subsidy from the rest of the firm”, it said yesterday in an emailed statement.
Auditors are under greater regulatory scrutiny than ever after a series of high-profile lapses in recent years, with EY’s role in the collapse of German payments provider Wirecard AG now under the microscope.
“These final principles follow extensive discussions with the audit firms,” the regulator said. “The FRC is now asking the Big Four firms to agree to operational separation of their audit practices on this basis and to provide a transition timetable to complete implementation by June 30, 2024, at the latest.”
The guidelines aim to shield auditors from being influenced by another part of a firm’s business “that could divert their focus away from audit quality,” the regulator said.
“KPMG supports operational separation in the UK,” Jon Holt, the firm’s head of UK auditing, said in a statement. “It is clear, however, that operational separation of the UK’s audit firms is just the first step on the journey to restoring trust in UK plc.”
The accounting firms said they were working with the FRC to develop ways for the separation. They’re expected to submit plans by Oct 23.
“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,” said Stephen Griggs, Deloitte’s deputy CEO.
“We share the FRC’s objectives of improved quality and confidence in audit,” PwC said in statement. “We will continue to engage constructively with the FRC on the complexity and detail of these principles.
Audit practice culture should encourage ethical behaviour, openness, teamwork and professional scepticism and judgement, the FRC said. Profits distributed to partners should not “persistently exceed the contribution to profits of the audit practice,” the FRC said.
After the firms submit their plans, the FRC will set a transition timetable with each, and then publish an annual assessment of how well they are complying with the principles.
The planned reforms present a significant opportunity to improve corporate reporting but won’t be enough on their own, Hywel Ball, EY’s UK chair, said in a statement.
“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,” he said. — Bloomberg