UK’s Big Four Accounting Firms Told to Outline Plans Split Out Audit by October
The UK’s big four accounting firms; PwC, Deloitte, KPMG and EY have until 2024 to separate their audit practices from their other provided business services. This move by the accounting regulator will be the biggest shakeup in the history of the accounting industry for decades.
The Financial Reporting Council (FRC) has issued a 22-point plan as to the operational separation of each companies audit practice and they must submit their outlined plans to achieve this by October 2020. Plans should address:
- Governance
- Board composition
- Scope of separate practices
- Transparency with audit and the rest of the firm – arm’s length arrangements
- Separate Profit and loss
- Renumeration of partners
- Transition arrangements
This overhaul is a result of some high-profile corporate failures; Carillion in 2018, which triggered a string of reviews in the audit sector, which concluded that there needs to be a great deal more in the way of competition, reform and to end conflicts of interest. Unlike the wishes of politicians, the FRC fell short of asking for a full break up of the firms, spinning off audit businesses into separate legal entities
Other high-profile collapses have only increased the scrutiny of the big four accounting firms (BHS, WireCard and Thomas Cook) who currently audit 100% of the FTSE 100 firms and 93% of the FTSE 250 firms
The big four generate about 20% of their revenue from audit activities, which is dwarfed by their rapidly expanding advisory services over recent years. By having the business steams separated aims to introduce better audit quality and market transparency by eliminating any material cross-subsidy. The reforms, however, will not apply to any mid-tiered firms such as Grant Thornton and BDO for example, as there are some concerns over the resilience of these smaller firms to effectively separate out audit profits
The FRC has not gone as far to insist upon separate pools of distributable reserves to be paid to its partners, but firms “should not persistently exceed the contribution to profits of the audit practice”
Currently, the regulatory watchdog relies upon voluntary compliance by the accounting firms and it is likely that this will be replaced with a regulator with far-reaching powers to enforce changes at the big four level (Audit, Reporting and Governance Authority)
Who are we?
Re/think is a boutique accounting, regulatory and compliance, VAT advisory, audit, HR consultancy, recruitment and business advisory firm. We specialize in assisting SME clients with cost-effective, high-quality services and solutions. We create value by investing in highly qualified and motivated people and working closely with leading industry partners to provide our clients with a one-stop-shop for all of their business support.
Authors
David Linklater
PARTNER & DIRECTOR OF ACCOUNTING & CFO SERVICES