Big Four calls for leeway on high-risk audits
Large accounting firms want the regulator to ease up and give them some leeway in return for auditing high risk clients, but many in the profession disagree and see the big firms as misunderstanding basic aspects of the job.
Fear of public criticism has prompted large audit firms to request leniency from the accountancy regulator for taking on difficult jobs, but the proposals have not gone down well with industry experts.
The Big Four and a handful of challenger firms want to pause inspections of their work if they agree to audit high-risk companies listed on the London Stock Exchange, the Financial Times first reported.
Their work for new clients should be free of scrutiny due to the complexities of auditing a company for the first time, and the subsequent concern of public criticism for any errors made.
The request was made on a January call with the Financial Reporting Council, which was attended by staff from Deloitte, EY, KPMG and PricewaterhouseCoopers, along with executives from BDO, Grant Thornton and Mazars.
It is understood the regulator rejected the proposal that new clients should be totally exempt for annual quality inspections.
One auditor is believed to have argued that unless the FRC backed off when firms took on high risk audits “the best thing for us to do is swerve it”. Another added that putting people off tough audits was “not a good outcome”.
On having the request turned down, the auditors then suggested the FRC could instead inspect the audits of new or potentially high-risk companies, but that the results would be excluded from the audit firms’ public grades. This would give the watchdog an opportunity to identify areas of improvement and protect the auditor from reputational damage.
The FRC, Deloitte, EY, KPMG, PwC, BDO, Grant Thornton and Mazars declined to provide comment.
‘All that is wrong with the profession’
Few punches have been pulled in in response to the pleas.
“Big accounting firms deliver dud audits and have asked the UK regulator to suspend audit quality checks for new clients whilst still collecting fat fees. How would that improve audit quality? Should we suspend quality concerns for new medicines, automobiles?” said Labour peer and accounting expert Lord Prem Sikka. “The audit firms’ proposals are a recipe for a race-to-the-bottom.”
“These would seem to be precisely the type of clients that need oversight. What is going on that they don’t want discovered, is my first question?” added Tim Bush, head of corporate governance at shareholder advisory group PIRC.
Accounting professors and manager of Tax Research UK Richard Murphy said if auditors cannot get the job right in the first year then they should not take the job, as “that is what professional ethics requires that they decide”.
The appeal suggests that the auditors are unaware they can qualify their opinion on companies presenting this type of risk, Murphy said. “If that risk is real it should be reported, and nor be whitewashed by relaxing audit standards,” he said, adding that if the companies themselves couldn’t get auditors they would have to change their behaviour or risk going out of business.
“Can’t these auditors see that changed behaviour is what they are meant to deliver? Apparently not. And that is what is wrong with the profession,” Murphy said.
An accountant in the forensic services team at PwC speaking anonymously told AccountingWEB the worst-case scenario was if nobody audits a company due to fear, then the Secretary of State is forced to step in which will grant the firm leniency anyway.
“We’ve seen what happens when big firms drop risky clients; smaller auditors get appointed which can impact quality,” the accountant said. “There’s also the question of liability; the regulator might give some leeway but ultimately wronged shareholders can still sue so it’s not like the accounting firm gets off easily.”
Blacklist under-performing auditors
Pressure has been mounting on audit firms following years of high-profile scandals, from Carillon to Patisserie Valerie, Wirecard, Thomas Cook and Lookers, that have undermined faith in the sector from the public, investors and government.
The Department for Business, Energy and Industrial Strategy (BEIS) is taking responses to a consultation to improve transparency in the sector and strengthen audits of the UK’s largest firms.
PIRC however believes large audit firms who are not doing enough to find and deal with corporate fraud should be blacklisted.
It told investors not to reappoint PwC, KPMG, EY or Grant Thornton because it believes they have not done enough to improve their fraud detection process.
PIRC is trying to force accounting firms to address the “expectations gap” between existing professional standards for auditors over corporate fraud and what the public and courts demand.
In contrast, PIRC said Deloitte, BDO and Mazars have improved or committed to enhance their fraud detection processes.
A PwC spokesperson said: “We support measures that promote high quality audits and, as part of our three-year Programme to Enhance Audit Quality, we introduced additional training for our auditors from our forensic investigations practice about frauds they have investigated and what our auditors can learn from their experiences.”
KPMG, EY and Grant Thornton were also contacted for comment.
“The blacklisting of certain UK auditors is an influential development, particularly since Pirc is one of Europe’s largest shareholder consultancies,” said Anita Clifford, barrister at Bright Line Law. “The decision occurs in the wake of high-profile corporate collapses in the UK in recent years, such as Patisserie Valerie and Carillion, which have had underlying fraud allegations. There have also been a handful of Deferred Prosecution Agreements of household name companies for fraud.
“These scandals have turbo-charged an ongoing debate about the role of an auditor, what professional scepticism means in practice and whether the major players are doing enough to combat fraud. When a well-known company fails or is reprimanded, the finger is inevitably pointed at the independent auditor rightly or wrongly.”
Suggestions of blacklisting may refocus minds on anti-fraud procedures, Clifford said, adding that if the recommendation was followed, large firms “stand to lose a significant stream of work”.