The so-called Big Four accountancy firms must do more to challenge their clients, the UK’s industry watchdog said, after a string of scandals that exposed failures in annual audits and prompted a shake-up of the sector.
The UK’s Financial Reporting Council (FRC) assessed the seven largest firms, which reviewed 88 audits and concluded that only two thirds of them were of a good standard or required limited improvement. It described the situation as “unacceptable”.
They included the so-called big four – KPMG, Deloitte, Ernst & Young and PricewaterhouseCoopers. Deloitte scored the highest of the four with 76 per cent of the audits evaluated by the council deemed “good” or needing limited improvements. EY scored 71 per cent, with PwC scoring 65 per cent and KPMG at 61 per cent.
“We are concerned that firms are still not consistently achieving the necessary level of audit quality,” said David Rule, the council’s executive director of supervision. “The tone from the top at the firms needs to support a culture of challenge and to back auditors making tough decisions.”
The reviews come at a sensitive time, little more than a week after the FRC announced a timetable for a process that will see the Big Four split off their audit divisions from the rest of their business by June 2024.
Auditing is a less profitable part of their work and companies have been accused of signing off profits without asking enough questions to ensure the continuation of more lucrative consultation work. Critics say the approach has meant they have failed to spot emerging financial crises and identified frauds.
The industry has been in the spotlight since the demise of Arthur Andersen – once part of a Big Five – which saw its reputation shredded over its failures in auditing the accounts of Enron, the Houston-based energy company that went bankrupt in 2001.
EY, one of the Big Four, was responsible for auditing the accounts at NMC Health and the German digital payments company Wirecard, which have been rocked by fraud and mismanagement scandals this year. The council has opened an investigation into EY’s 2018 audit of NMC Health.
EY described Wirecard as an “elaborate” fraud that even a rigorous probe may not have discovered but said that it was adding 700 people to help improve its auditing unit.
“We are disappointed our overall results are not higher and we have plans in place to address the FRC’s feedback,” Andrew Walton, head of EY’s UK auditing business, said. He said the company was focusing on a “developing a culture of professional scepticism”.
Richard Murphy, an accountant and economics professor at City, University of London, said there had been a “rapid decline” in auditing standards that would lead to more company failures at a time when society could least afford it. “It’s an outright failure of the audit profession and regulators,” he said.