Auditors could face consulting ban

8 October 2018

Accountancy firms could be banned from doing consultancy work for companies whose books they check.

In its Developments in Audit report, the Financial Reporting Council (FRC) said the Big Four auditing firms – Deloitte, EY, KPMG and PwC – frequently give lucrative consultancy services to large corporates whose books they also check, prompting worries that they may not provide sufficient challenge to the management of such companies when auditing them.

It said it would review its own guidelines for auditing and ethical standards, which currently allow the firms to undertake both auditing and consultancy for clients at the same time.

The FRC also criticised KPMG, the auditor of Carillion until its collapse this year, finding a “deterioration in the quality of the audits that we inspected to an unacceptable level”.

“The review will include determining whether further actions are needed to prevent auditor independence being compromised, including whether all consulting work for bodies they audit should be banned,” the FRC said, adding that it would work closely with the Competition and Markets Authority (CMA).

The document highlighted growing concerns from firms about audit quality in the wake of scandals such as KPMG’s involvement in Carillion’s collapse.

“High-profile failure has taken its toll,” the report said, “with a majority of those we spoke to telling us they were more concerned about audit than a year ago.

“Many also expressed frustration that issues impacting on audit quality and confidence in audit continually recur.”

But the FRC itself is under pressure from the government after a review into the organisation’s role and effectiveness began in June, following accusations from the Work and Pensions Committee that it was “toothless and useless”.

The independent review is being led by Sir John Kingman, chairman of Legal and General and former second permanent secretary to the Treasury.

In the meantime, the FRC has embarked on an “enhanced programme” of audit firm monitoring and “strengthened” its enforcement capacity so it can conclude cases more quickly. It has also introduced new standards for determining risks and a review of auditing ethics in the wake of the criticism.

Stephen Haddrill, chief executive of FRC, said: “This comprehensive reform programme addresses fundamental issues underlying falling trust in business and the effectiveness of audit, whilst also looking to ensure that the requirements on what companies say about themselves are fit for the future needs of stakeholders.

“If stakeholders are to have confidence in audit, they also need to have confidence in audit rules and regulation.

“The FRC has reviewed how we can improve audit quality and our supervision of audit firms. In addition to the programme set out today we look forward to proposals from Sir John Kingman and the CMA.”

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