UK regulators have banned audit firms from providing a number of advisory services to listed companies and financial institutions in an effort to strengthen auditor independence after a series of scandals.
The Financial Reporting Council on Tuesday issued a “radical” update to its ethical standards for audit firms, which have been scrutinised over poor audits and possible conflicts of interest in the wake of corporate collapses such as at Carillion, BHS and Thomas Cook.
The regulator banned accounting firms from providing all recruitment and remuneration services and due diligence from the public interest entities they audit — mostly listed companies, banks and insurers. It also prohibited them from giving tax advice, advocacy and acting in any management role.
The move could strip out millions of pounds of revenue from the so-called Big Four of PwC, KPMG, Deloitte and EY. This year they have increased audit fees to shore up their practices ahead of a possible forced break-up.
PwC was criticised by MPs in October for a “clear conflict” for providing recruitment and remuneration advice to Thomas Cook’s board while it audited the travel group between 2007 and 2012. The FRC had banned the provision of such advice by an auditor of a public interest entity in 2016 but with caveats, such as around seniority of staff. The revised 2019 standard totally prohibits all such services.
The new guidelines set out a list of permitted non-audit services for auditors. They are a departure from the old standard, published in 2016, which instead told them which services were prohibited.
“The issue we had was that the prohibited list was too open to interpretation,” said Mark Babington, audit director of the FRC. He said the regulator had also moved to “absolute prohibition” of a number of services, removing caveats to its previous rules.
Mr Babington added that the revised standard also removed a number of “grey areas” around what was considered essential non-audit work. “I found that the audit firms talk about offering ‘essential’ non-audit services, but their list of what was essential was a lot longer than mine,” he said, and described the changes to the ethical guidelines as “radical”.
“This is our response to some of the failings we’ve identified through our inspection and enforcement work,” he said. “To not make these changes would be to not correct the issues that led to a failed audit.”
Auditors will still be able to provide advisory services where the “reporting is required by law or regulation”, and also on the reviews of interim financial information, which do not count as part of the audit, and reporting on regulatory returns, client assets, government grants and internal financial controls.
This year, the Big Four pledged to ban “all but essential” non-audit services to the large listed companies they audit following pressure by MPs. However, transparency reports issued by the firms showed they continued to make millions of pounds in fees from providing advisory work to audit clients.
KPMG made £185m in fees for non-audit services provided to audit clients (8 per cent of revenues) in 2019; Deloitte made £195m (6 per cent of revenues); PwC made £239m (6 per cent); and EY made £118m (5 per cent).
Stephen Griggs, deputy chief executive and head of audit at Deloitte UK, said he was “mindful” of the perception that auditors were incentivised to cross-sell unrelated advisory work to audit clients, but added: “In reality, a significant proportion of current non-audit work is directly associated with our role as auditors and includes the review of half-year releases, assurance work associated with bond offerings and supporting capital market transactions.
“All of these are technically classed as ‘non-audit’ services but, in practice, the auditor is best placed, and in some cases actually required, to do them.”