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Company audits face tougher scrutiny under new plans UK accountancy firms face major overhaul under new plans
(35 minutes later)
Plans to make sure that company accounts get tougher scrutiny have been outlined by regulators. The UK's Big Four accountancy firms are facing a major shake-up under reforms proposed by the competition watchdog.
After auditors KPMG failed to foresee the collapse of construction firm Carillion, the Competition and Markets Authority wants to shake up the system. The Competition and Markets Authority (CMA) wants to separate audit from consulting services, while also encouraging a wider choice of auditors.
"If a company's books aren't properly examined, people's jobs, pensions or savings can be at risk," it said. The review follows high-profile company collapses such as construction firm Carillion, which was audited by KPMG.
The CMA wants to separate audit from consulting services, while also encouraging a wider choice of auditors. The CMA said if its proposals "are not far-reaching enough", it "will persist until the problems are addressed".
The regulator said that at present, the "Big Four" accountancy firms - Deloitte, EY, KPMG and PwC - conduct 97% of big companies' audits, while also providing them with other services.The regulator said that at present, the "Big Four" accountancy firms - Deloitte, EY, KPMG and PwC - conduct 97% of big companies' audits, while also providing them with other services.
"Companies choose their own auditors," said the CMA."Companies choose their own auditors," said the CMA.
"As a result, we have seen too much evidence of them picking those with whom they have the best 'cultural fit' or 'chemistry', rather than those who offer the toughest scrutiny.""As a result, we have seen too much evidence of them picking those with whom they have the best 'cultural fit' or 'chemistry', rather than those who offer the toughest scrutiny."
The CMA said "robust reform" was needed. Businesses should be audited by the most challenging firm - not the cheapest.
Its three main recommendations are:
New regulatorNew regulator
The Financial Reporting Council, which regulates the accountancy sector, has also been under review and plans have been put forward to toughen up the regulation of major audit firms.The Financial Reporting Council, which regulates the accountancy sector, has also been under review and plans have been put forward to toughen up the regulation of major audit firms.
The report, headed by Sir John Kingman, recommends that the FRC is replaced by a new Audit, Reporting and Governance Authority.The report, headed by Sir John Kingman, recommends that the FRC is replaced by a new Audit, Reporting and Governance Authority.
He said: "All in all, some of the FRC's critics overstate their case. Nevertheless, I have sympathy with the view that the FRC has tended, overall, to take too consensual an approach to its work.He said: "All in all, some of the FRC's critics overstate their case. Nevertheless, I have sympathy with the view that the FRC has tended, overall, to take too consensual an approach to its work.
"The FRC's approach to its own governance has also not been consistent with either its public importance, or its role in championing governance in the corporate world. We need to take the opportunity to make a fresh start.""The FRC's approach to its own governance has also not been consistent with either its public importance, or its role in championing governance in the corporate world. We need to take the opportunity to make a fresh start."
'Intractable problems''Intractable problems'
The CMA said "robust reform" was needed. Businesses should be audited by the most challenging firm - not the cheapest.
Its three main recommendations are:
CMA chairman Andrew Tyrie said: "Addressing the deep-seated problems in the audit market is now long overdue.CMA chairman Andrew Tyrie said: "Addressing the deep-seated problems in the audit market is now long overdue.
"Most people will never read an auditor's opinion on a company's accounts. But tens of millions of people depend on robust and high-quality audits.""Most people will never read an auditor's opinion on a company's accounts. But tens of millions of people depend on robust and high-quality audits."
The CMA said its proposals would be open to public consultation until 21 January.The CMA said its proposals would be open to public consultation until 21 January.
"These intractable problems may take some years to sort out," said Mr Tyrie. "These intractable problems may take some years to sort out," said Mr Tyrie. "If it turns out that the proposals are not far-reaching enough, the CMA will persist until the problems are addressed."
"If it turns out that the proposals are not far-reaching enough, the CMA will persist until the problems are addressed."
PwC, EY, KPMG and Deloitte comprise what many people have described as an oligopoly.PwC, EY, KPMG and Deloitte comprise what many people have described as an oligopoly.
Competition authorities, a regulatory investigation and the government have all weighed in on the same day to try and restore faith in the firms paid for making sure that the financial information published by the companies that pay them can be trusted.Competition authorities, a regulatory investigation and the government have all weighed in on the same day to try and restore faith in the firms paid for making sure that the financial information published by the companies that pay them can be trusted.
In recent years, the fingerprints of big accounting firms have been found at the scene of many corporate scandals including the collapse of Carillion which was given a clean bill of financial health just months before it was liquidated. In recent years, the fingerprints of big accounting firms have been found at the scene of many corporate scandals, including the collapse of Carillion, which was given a clean bill of financial health just months before it was liquidated.
Veteran civil servant Sir John Kingman's report is recommending the existing professional oversight body be replaced.Veteran civil servant Sir John Kingman's report is recommending the existing professional oversight body be replaced.
Competition authorities want to see the auditing work separated from other services, smaller firms to have a greater role in partnership with the "Big Four" and suggests a cap on any single auditors market share.Competition authorities want to see the auditing work separated from other services, smaller firms to have a greater role in partnership with the "Big Four" and suggests a cap on any single auditors market share.
Meanwhile, the government has asked the outgoing chairman of the London Stock Exchange to spearhead new attempts to improve the quality of information on which investors - including pension funds - rely.Meanwhile, the government has asked the outgoing chairman of the London Stock Exchange to spearhead new attempts to improve the quality of information on which investors - including pension funds - rely.
After waiting years for a review of a sector many think riven by conflicts of interest - three come along at once. After waiting years for a review of a sector many think riven by conflicts of interest, three come along at once.
Last month, KPMG said it would no longer do consultancy work for the UK's biggest companies if it was also auditing them, in order to "remove even the perception of a possible conflict" of interest.Last month, KPMG said it would no longer do consultancy work for the UK's biggest companies if it was also auditing them, in order to "remove even the perception of a possible conflict" of interest.
The FRC said the auditing work of the Big Four firms had worsened, adding that KMPG's audits in particular had shown "an unacceptable deterioration".The FRC said the auditing work of the Big Four firms had worsened, adding that KMPG's audits in particular had shown "an unacceptable deterioration".
KPMG said the CMA's proposals were "constructive suggestions which seek to address challenges our industry faces and we ourselves have recognised".KPMG said the CMA's proposals were "constructive suggestions which seek to address challenges our industry faces and we ourselves have recognised".
'Trust and confidence''Trust and confidence'
The Government said it would now launch an independent review into the "quality and effectiveness" of the UK audit market which it said will build on the findings by Sir John and the CMA. The Government said it would now launch an independent review into the "quality and effectiveness" of the UK audit market, which it said will build on the findings by Sir John and the CMA.
It will be led by Donald Brydon, the outgoing chairman of the London Stock Exchange.It will be led by Donald Brydon, the outgoing chairman of the London Stock Exchange.
Business Secretary Greg Clark said: "Audit companies need to learn the recent lessons from high profile audit failures and reform to regain public confidence, or they will be forced to do it."Business Secretary Greg Clark said: "Audit companies need to learn the recent lessons from high profile audit failures and reform to regain public confidence, or they will be forced to do it."
Commenting on the CMA's proposals, David Sproul, senior partner and chief executive of Deloitte, said: "It's clear that trust and confidence in the role of the profession is not where it should be and we are supportive of change that enhances audit quality and maintains the competitive position of the UK as we prepare to leave the EU."Commenting on the CMA's proposals, David Sproul, senior partner and chief executive of Deloitte, said: "It's clear that trust and confidence in the role of the profession is not where it should be and we are supportive of change that enhances audit quality and maintains the competitive position of the UK as we prepare to leave the EU."
Kevin Ellis, chairman and senior partner of PwC UK, described at as "a watershed moment" for the audit sector.Kevin Ellis, chairman and senior partner of PwC UK, described at as "a watershed moment" for the audit sector.
He said: "The proposals will require careful and wide consultation in order to deliver practical remedies which serve the best interests of shareholders, companies and society at large."He said: "The proposals will require careful and wide consultation in order to deliver practical remedies which serve the best interests of shareholders, companies and society at large."