The UK’s accounting and auditing watchdog has ordered the biggest firms to put more distance between their auditing operations and the rest of their business.
The Financial Reporting Council (FRC) has said that the plans should be drafted by October 2023 and acted upon by the middle of 2024. The FRC sees this as vital to reducing potential conflicts of interest and boosting the quality of audits in the UK.
Its action follows a series of large, high-profile corporate failures, including construction and management services company Carillion, café’ chain Patisserie Holdings and travel agents Thomas Cook.
The FRC has listed 22 principles that the “Big Four” firms - Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers - have to comply with. They will have to ring-fence their auditing activities and make sure their audit partners spend most of their time on audits. Their audit practices will have to publish their own profit and loss statements – independent of those of the firm – and audit partners’ pay will be based on their contribution to audit practice profits.
The FRC is also calling for firms to be more transparent about their audit businesses and for auditors to exercise both ethical behaviour and professional scepticism while doing their work. But it has not gone as far as ordering the firms’ auditing operations to be made separate legal entities.
Given recent corporate failings, there is no surprise that the FRC is taking such a stance. Yet it remains to be seen what new regulatory powers will be introduced to ensure that bigger firms are establishing appropriate measures for their auditing practices.
This article originally featured on Mondaq, it can be read here.