Momentum Against Big Four Builds in UK

By:
Chris Gaetano
Published Date:
Jun 19, 2018
By David Liuzzo, CC BY-SA 4.0

The United Kingdom's Financial Reporting Council, which regulates the audit profession, has found that Big Four firm KPMG is not performing work to an acceptable standard, exacerbating the already-tense relationship between the government and the Big Four in the wake of several high-profile audit failures, according to the Guardian. The criticism comes from a recently issued report from the regulator that found that, as a whole, large audit firms fail to challenge management and show appropriate skepticism across their audits, though it singled out KPMG in particular for an "unacceptable" deterioration of its work over the years.

This assessment came from a review of audits conducted on large firms by the Big Four. It found that, overall, 72 percent of all audits required no more than limited improvement, down from 78 percent last year. When looking at audits KPMG performed, however, the report said that only half were deemed satisfactory. Michelle Hinchliffe, the head of audit at KPMG in the UK, said the firm was disappointed with its audit quality score, adding: “We are taking action to resolve this ... we cannot and will not be satisfied with these results and, as a firm, we are already working to put this right.”

Other firms did a little better: 79 percent of Deloitte audits were considered satisfactory, as well as 82 percent of E&Y audits and 84 of PwC audits, though all four firms had worse records than they did the previous year. On the other hand, it was found that audits of non-Big Four firms BDO, Mazars, Grant Thornton and Moore Stephens had generally improved. 

The report comes at a time of intense criticism of the Big Four after the collapse of a major government contractor connected to all four firms, according to Bloomberg. This collapse, in turn, sparked additional scrutiny of other audits, leading to fines against KPMG for its audit of Quindell and against PwC for its audit of BHS. The FRC itself had been derided as largely toothless, especially after the financial crisis, though Bloomberg speculated that the regulator's latest moves may be a sign it's willing to get more aggressive in its oversight. 

Beyond fines, there have also been calls from Parliament to break up the Big Four entirely, with a report saying that the firms dominate so much of the market that they are unable to provide the necessary level of independent challenge to fulfill their audit functions.  A break-up scenario could involve two options: either forcing each large firm to split into two smaller multidisciplinary firms, or making all of them spin off their consulting work to create audit-only businesses. 

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