KPMG and Deloitte to stop non-audit work on audit clients
KPMG and Deloitte have said they support a ban on UK auditors selling consultancy services to their audit clients, as Britain’s professional services sector prepares to undergo its most radical shake-up in decades.
Deloitte has also recommended a market share cap in the UK audit market among the Big Four, as the quartet fight to avoid break up following a series of accounting scandals.
The firm said in its evidence submission to a Competition and Market Authority review of the sector that imposing a cap on the number of audit clients a firm can take would address choice and competition issues, lower barriers to entry and ease concerns around the resilience of the UK audit market.
It believes a ban on non-audit services provided to FTSE 350 and large unlisted public interest entity audit clients would resolve issues around conflicts of interest. Currently, 97% of the FTSE 350 is currently audited by a Big Four firm.
The quartet dominate the UK’s £12.6bn accounting market but have drawn the ire of regulators in recent years, resulting in a full-blown CMA probe launched last month amid heightened talk of breaking up the four, which also includes EY and PricewaterhouseCoopers (PwC).
Both EY and PwC have so far declined to comment.
KPMG made the announcement to partners last Thursday, stating the firm would shutter all services deemed non-essential for large listed audit clients to “remove even the perception of a possible conflict [of interest]”.
This would cover restructuring, M&A, and IT advice, and would put hundreds of millions in fee income up for grabs.
KPMG was earlier this year slammed by the Financial Reporting Council, Britain’s accounting watchdog, over the quality of its audit work, which had fallen to an “unacceptable level”.
Concern over the collapse of construction group Carillion, following controversial audit work carried out by KPMG, was cited as one of the triggers of the CMA probe.
Deloitte is not expected to implement any changes before the CMA publishes its conclusions by the end of the year.
It claims conflicts of interest between its public interest audit responsibilities and the advisory services it provides happens “very infrequently”, but admitted a ban would help improve public trust in the UK’s audit market.
“In making our recommendations, we have applied a principle that any change must enhance audit quality, therefore improving trust and confidence in the UK’s capital markets,” said David Sproul, chief executive of Deloitte in the UK and north-west Europe.
“We propose banning all non-audit services to FTSE 350 and large public interest entity audit clients.”
As part of this, there needs to be a clear definition of what an audit service is, Sproul said, adding that all other services, with no exceptions, would then be banned.
“We would suggest that as well as the annual audit, this includes the half-year review, bond offerings, grant applications, reporting on historical financial information, work on offering circulars and similar services. All other services, with no exceptions, would be banned,” the firm wrote in its response.
However, Deloitte argued that splitting up the Big Four is “not workable and would lead to a deterioration in audit quality”.
“We strongly believe that [the CMA’s proposals] would not be effective in improving audit quality or increasing effective competition or resilience in the market. On the contrary, both would damage audit quality,” the firm said.
According to the Financial Reporting Council’s annual report, Deloitte earned £214m in fee income from non-audit work for audit clients last year – less than 10% of its total £2.9bn turnover.
KPMG earned £198m in audit fees from FTSE 350 clients last year and an extra £79m from providing consulting services to those clients.
Roughly half of those non-audit fees are expected to be put at risk as a result of this decision, equating to about 3.6% of the firm’s total UK revenues last year of £2.2bn.
The CMA’s predecessor, the Competition Commission, in 2011 undertook a review of the audit market that resulted in large listed companies being forced to change auditors every 20 years. The investigation centred on whether competition in the audit market was distorted or restricted.