The Big Four professional services firms have been given the deadline of 2024 to separate their audit and consultancy work.
The Financial Reporting Council (FRC) said the aim of separating the audit practices of the firms – EY, PwC, KPMG and Deloitte – was to make sure that they were focused on high quality audits in the public interest and did not rely on persistent cross subsidy from areas such as consultancy services.
The council said the four main objectives were that:
• Audit practice governance prioritises audit quality and protects auditors from influences from the rest of the firm that could divert their focus away from audit quality
• The total amount of profits distributed to the partners in the audit practice does not persistently exceed the contribution to profits of the audit practice
• The culture of the audit practice prioritises high-quality audit by encouraging ethical behaviour, openness, teamwork, challenge and professional scepticism/judgement
• Auditors act in the public interest and work for the benefit of shareholders of audited entities and wider society.
The publication of the separation principles follows calls from MPs to improve transparency and neutrality after auditing failures linked with the collapse of Carillion and BHS.
A report by the Business, Energy and Industrial Strategy Committee said there should be a full structural break-up of EY, PwC, KPMG and Deloitte into audit and non-audit businesses.
The FRC said the principles for the separation followed extensive discussions with the audit firms. It has asked the companies to agree to operational separation and submit an implementation plan by October 2020. They must also provide a transition timetable to complete implementation by June 2024 at the latest.
The FRC said it would publish an annual assessment of the firms’ delivery of the objectives and outcomes of operational separation.
FRC chief executive Sir Jon Thompson said separation was one element of the FRC’s strategy to improve the quality and effectiveness of corporate reporting and audit in the UK, following several reviews.
“The FRC remains fully committed to the broad suite of reform measures on corporate reporting and audit reform and will introduce further aspects of the reform package over time,” he said.
As the competent authority for audit in the UK the FRC sets auditing and ethical standards and monitors and enforces audit quality.
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