The Financial Reporting Council (FRC) told UK’s “big four” accountancy firms to fence off their auditing operations as part of a drive to improve oversight of corporate finances in the wake of high-profile collapses such as Carillion and BHS. The FRC told KPMG, PwC, Deloitte and EY that it expects them to have separated their auditing divisions from the rest of their operations by June 2024.
The FRC issued the instruction amid a broader effort to overhaul the accounting profession that has led to three government-backed reviews but has yet to result in legislation. The call to hive off audit work comes after one of the reviews, led by the City grandee Sir Donald Brydon, called for “urgent reform”, recommending that auditing be treated as a separate profession to accounting.
Accounting firms have found themselves the subject of intense criticism for perceived inaction in the years leading up to the financial collapses of the retailer BHS and builder and government contract Carillion. The twin financial failures have led to calls from MPs for the big four accounting firms to be broken up to reinvigorate the market and improve standards.
However, the FRC said it had discussed new principles with accounting companies and had told them to set out plans to improve their profession by October this year. They include a provision that auditors be protected from influence that could come from the rest of the firm to reduce audit quality.
MPs have previously questioned whether accounting firms have an incentive not to ask difficult questions about the finances of companies that are also paying them for other services. The FRC also said that the amount of profit distributed to the partners of any one company’s audit practice should not persistently exceed the profits of the division itself.
The FRC chief executive, Sir Jon Thompson, said: “Operational separation of audit practices is one element of the FRC’s strategy to improve the quality and effectiveness of corporate reporting and audit in the UK following the Kingman, CMA and Brydon reviews.
