May 28, 2022


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UK accounting watchdog tells Big Four to run businesses better

The head of the UK accounting regulator has warned top management at the Big Four audit firms that they should do a better job of running their own businesses.

Sir Jon Thompson, chief executive of the Financial Reporting Council, made the comments ahead of the launch on Tuesday of the watchdog’s first blueprint for how accountants should carry out good audits.

“If you were the head of audit at one of the Big Four and you read this document, you’d be thinking ‘I think those are the things I’m [already] trying to do’,” he said. “The problem, as far as we’re concerned, is they don’t really do it.”

Much of the content of the new guide, What Makes a Good Audit?, is similar to the regulator’s previous statements on audit quality. But Thompson told the Financial Times it was necessary to repeat these points because of persistent problems with audit quality, including among the Big Four — Deloitte, EY, KPMG and PwC.

“To be frank, one of the things that strikes you when you meet these people is they give people advice about how to run their businesses better but sometimes they don’t run their own business very well,” he said.

The Big Four have faced scrutiny over a series of corporate scandals and have been fined a total of £42m in the past three years for failing to properly check the accounts of companies, including Autonomy, the software provider, and transport group Stagecoach.

“If we’re telling people who are running these multibillion-pound firms to do something they should have known how to do years ago: why can’t they do it [already]?” Thompson said, pointing to the firms’ scores in the FRC’s annual audit inspections.

Almost 30 per cent of company audits by the seven leading audit firms were deemed to require improvement in this year’s FRC quality inspections though Thompson said there had been some improvement in recent years.

The Big Four have already agreed with the FRC to an “operational separation” of their audit and consulting businesses and ministers are considering forcing large companies to give some of their audit work to midsized firms to boost competition.

The FRC, which is expected to be replaced by a new regulator with greater powers, has been under pressure to focus more on helping auditors to improve their work following a review in 2018 by Sir John Kingman, the chair of Legal & General.

Thompson, who joined the FRC in 2019, said the new guidance, which includes sections on how to carry out a good audit and on how to run a high-quality audit practice, was part of the FRC’s efforts to become an “improvement regulator”.

Referring to the FRC’s previous approach, he said: “We just were essentially a regulator that commented on what wasn’t working, as opposed to saying ‘well this is how you could improve’.”

The guidance would also act as a road map for smaller accounting firms trying to expand their audit practices by showing the regulator’s expectations in areas such as culture, governance and leadership and training, he said.

Kevin Ellis, UK chair and senior partner of PwC, said his firm was “surprised” at Thompson’s comments about the Big Four as they were “inconsistent with the feedback we’ve had as a firm from the FRC”.

Deloitte, EY and KPMG declined to comment.