The UK’s most significant accountancy firms have been informed to ring-fence their audit arms from their consultancy systems by 2024 in a significant shake-up of the sector.
The Financial Reporting Council (FRC) has actually informed the “Big 4” they should send separation strategies by October.
It follows the collapse of a number of high-profile companies that had been authorized by auditors, such as government professional Carillion.
The FRC said the modifications would cause much better audits “in the public interest”.
It stated separating accountancy companies’ audit departments from the rest of their operations would protect auditors “from impacts from the remainder of the company that might divert their focus far from audit quality”.
The guard dog also stated it would guarantee “auditors act in the public interest and work for the benefit of shareholders of audited entities and wider society”.
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The Big 4 accountancy companies – KPMG, EY, PwC and Deloitte – came in for heavy criticism in the wake of Carillion’s collapse which cost 2,400 individuals their jobs and – according to the National Audit Workplace – left the taxpayer on the hook for ₤ 148 m.
At the time, MPs said the failure Carillion exposed the UK’s audit market as a “cozy club incapable of providing the degree of independent difficulty needed”.
Ever since holiday company Thomas Cook, which was audited by PwC and consequently EY, has actually folded.
More recently, the German payments firm Wirecard revealed a EUR1.9 bn (₤ 1.7 bn) hole in its accounts, and consequently applied for insolvency. It was audited by EY.
The FRC’s president, Sir Jon Thompson, stated: “Operational separation of audit practices is one aspect of the FRC’s technique to enhance the quality and effectiveness of corporate reporting and audit in the UK.”
Among the 22 concepts for operational separation that accountancy companies must carry out, investigate practices ought to produce a different revenue and loss account.
Companies should also have a separate board to make sure “independent oversight of the audit practice”.