LONDON (Reuters) - Britain’s accounting watchdog could ban accountancy firms from consultancy work for clients whose books they check, it said on Monday, stopping short of a break-up of the Big Four auditors.
Under pressure from lawmakers to toughen up supervision of accountants after collapses at outsourcer Carillion and retailer BHS, the Financial Reporting Council announced a new “strategic focus” to ensure that audit serves the public interest better.
The Big Four of PwC, EY, Deloitte and KPMG often provide lucrative consultancy work to the same businesses they audit, raising concerns that accountants may not be willing to challenge management of those companies.
PwC was fined a record 6.5 million pounds by the FRC in June for failing to flag its concerns about BHS. Its lead partner recorded only two hours of work on the audit but 31 hours on non-audit services.
“The review will include determining whether further actions are needed to prevent auditor independence being compromised, including whether all consulting work for bodies they audit should be banned,” the FRC said in a statement.
The FRC will work closely with the Competition and Markets Authority (CMA) in this area, it said.
EY said it welcomes measures that would encourage new entrants into the audit sector, but remains fully committed to the multidisciplinary model combining auditing and consultancy.
Deloitte said it supported the FRC’s review, but that a wider discussion about the future of auditing.
PwC had no immediate comment and KPMG declined to comment.
Taking lessons from recent company failures, the FRC said it will look to toughen up requirements for auditors to determine if a company is correct in stating that it is a going concern, meaning it has sufficient resources to continue in operation for a year or more.
The review will consider if accountants should say publicly if they have doubts about “realism” in a company’s statement on going concern, the FRC said.
The government has already ordered an independent review of the FRC after it was described by lawmakers as timid in its handling of accounting firms.
The review’s findings are due to be published before the end of the year and could propose increasing the FRC’s powers or a more radical restructuring.
The CMA has already heard proposals from the UK accounting sector, setting out temporary curbs on how many big listed companies the Big Four can audit.
The proposals are aimed at meeting lawmaker criticisms that the Big Four, who audit nearly all blue-chip companies, don’t face enough competition and may need to separate their audit and consulting activities.
PwC said last week that a break-up of the biggest accounting firms would not improve audit quality or boost competition.
The FRC said that a requirement for companies to change auditors more frequently has actually increased the Big Four’s market share of the top 350 companies.
It will issue a revised rule by the end of the year that would force auditors to check estimates of credit losses at banks more stringently after finding weaknesses in audits of banks.
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Editing by Andy Bruce, Louise Heavens and David Goodman