U.K. Accounting Watchdog Orders Big 4 to Split Consulting and Auditing Business

In light of numerous high-profile accounting scandals in the U.K., the Financial Reporting Council has ruled that the Big 4 must separate their audit functions from the rest of the firm.

The FRC, the U.K.’s accounting watchdog, decided Monday that the Big 4 have until June 2024 to make the move, with Oct. 23 of this year as the deadline for submitting a plan to do so.

The move, in response to concerns about a real or perceived conflict of interest, aims to draw a sharp line between consulting with clients versus overseeing the accuracy of a company’s financial records. Consulting revenue has grown, while audit revenue has shrunk to about one-fifth of total firm revenues of the Big 4, according to CNN London. Some fear the shift is dimming the focus on high-quality audits.

The FRC declared that profit payments to audit partners “should not persistently exceed the contribution to profits of the audit practice.” Additionally, auditors “should work for the benefit of shareholders of audited entities and wider society” and were “not accountable to audited entities’ executive management.” An independent audit board will oversee the practice, according to The Financial Times in London

Some observers say the reforms aren’t enough, according to two people who spoke to the newspaper. “It is a semi-split that is unlikely to be the last reform that will be needed,” says Erik Gordon, professor at the University of Michigan. One senior executive says, “If this is held out as the solution to audit quality then we’re all kidding ourselves.”

The Big 4 are the only firms impacted by the rule because they conduct more than 95% of the audits of the top 350 companies in the London stock exchange (FTSE 350), according to the FRC. All the Big 4 firms expressed support for the move in prepared statements and called for even more stringent reforms.

Some recent scandals include:

  • EY’s audit of Wirecard, a payment processing company in Germany, which filed for bankruptcy following discovery of a $2 billion hole in its accounts. The FRC says its reform measure was unrelated to Wirecard, as the move had been in the works previously, CNN London reports.
  • KPMG’s audit of Carillion, a construction company that went bankrupt in 2018. The firm was also investigated for its failure to detect corruption by South Africa’s Gupta family, which has close ties to President Jacob Zuma.
  • PwC’s audit of India-based Satyam Computer Services, which falsified its accounts. PwC was banned from auditing public companies there from 2018 to 2020.
  • Deloitte’s audits of collapsed furniture retailer, Steinhoff, and the lender African Bank, also in South Africa.

More news from EY

More news from KPMG

More news from PwC

More news from Deloitte