The U.K. is moving closer to a far-reaching shakeup of the Big Four accounting firms that would separate their audit and consulting businesses after a series of high-profile audit failures.
The Financial Reporting Council, the U.K. accounting watchdog, announced Monday it had asked the firms to agree to a separation based on a set of principles they have been discussing with the FRC and to submit an implementation plan by Oct. 23 that will need to be completed by June 2024.
The principles aim to, among other things, ensure that audit practice governance protects auditors from being exposed to “influences from the rest of the firm that could divert their focus away from audit quality.”
“Today the FRC has delivered a major step in the reform of the audit sector by setting principles for operational separation of audit practices from the rest of the firm,” Sir John Thompson, the FRC’s CEO, said in a news release.
The Big Four sign off on the accounts of more than 95% of the U.K.’s 350 largest listed companies. They have been under scrutiny since the collapse of government contractor Carillion, which had been audited by KPMG for 19 years.
A parliamentary committee called last year for a “full structural breakup” of the Big Four, saying it would be more effective than other options in “tackling conflicts of interest” and providing the “professional skepticism” needed to deliver high-quality audits.
But both the FRC and the U.K.’s competition watchdog recommended an operational split. The principles adopted by the FRC would also ensure that the total amount of profits distributed to audit practice partners does not persistently exceed the contribution to profits of the audit practice, a step that prevents consultancy work from subsidizing audit.
Audit fees accounted for only about a fifth of the Big Four’s 10.95 billion pounds ($13.7 billion) in combined U.K. fee income in 2018.
“We share the FRC’s objectives of improved quality and confidence in audit, market resilience and the continued attractiveness of the profession as a career, and are committed to playing our part,” PwC said in a statement.