Big Six set to face tougher scrutiny after auditing shortcomings
The Financial Reporting Council (FRC) has pledged to take a hard-line approach to the Big Six auditing firms after a spate of high-profile corporate governance failings at large UK businesses.
Carillion’s collapse followed hot on the heels of BHS’s bankruptcy and questionable employment practices at Sports Direct. In Carillion’s case, concerns were raised about Deloitte and KPMG, which had handled the organisation’s internal and external audits, respectively.
MPs grilled senior partners at the two auditing firms in February, and now the FRC has announced a number of measures to crack down on the Big Six: PwC, Deloitte, KPMG, EY, Grant Thornton and BDO.
What measures will the FRC take?
The FRC has been light on details so far, simply stating that its monitoring approach will cover five key pillars:
- Leadership and governance;
- Values and behaviours;
- Business models and financial soundness;
- Risk management and control; and
- Audit quality evidence.
More specifically, the watchdog unveiled plans to vet senior appointments at the Big Six to ensure the individuals in question have a sufficient appreciation for the importance of high-quality audits.
Candidates for board roles, head of audit positions and ethics vacancies are all expected to fall into this category, with the FRC feeding back to the audit firm with its opinions.
“The work of the Big Six audit firms is core to the integrity and transparency of UK capital markets, and so it is vital that the FRC introduces a new approach to monitoring their stability and performance by focusing on aspects of their businesses that are critical to the provision of high-quality audit,” said Melanie McLaren, executive director of audit and actuarial regulation at the FRC.
Do the measures go far enough?
Cynics will no doubt see the FRC’s announcement as something of a face-saving exercise, particularly as the UK government revealed a comprehensive review of the watchdog just one week after the news.
The FRC has been accused of letting the major accounting and auditing firms off the hook in the past, and experts are sceptical of whether the new monitoring approach will deliver results.
This is especially true given the fact that the FRC has no power over senior appointments at the Big Six and can only encourage the auditing firms to co-operate if the watchdog has serious misgivings about an applicant.
Erik Gordon, a professor at the University of Michigan’s business school, told the Financial Times that the FRC “needs to repair its tattered reputation”.
“The scandals are not the results of inexperience or incompetence. They are the result of insufficient will to do the real work of auditing and risk losing large fees. It is not clear how the FRC’s new idea addresses that,” Mr Gordon said.
Will this have an impact on hiring?
The auditing profession is undergoing a period of increased scrutiny, but whether or not this will have a knock-on effect for recruitment is difficult to gauge.
Organisations already have high expectations from senior appointments, and this current focus on the auditing profession may lead to a raising of the bar for candidates in the future.
That said, every role is different and should be judged on a case-by-case basis, which is why both organisations and candidates should utilise specialist corporate governance recruitment experts in order to get the best results.
If you’re an internal auditor looking for your next opportunity in the industry, or an employer hoping to optimise your auditing function, I’d love to discuss your options. Contact me on 0207 936 2601 or via email at firstname.lastname@example.org.
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