Critics have slammed the idea that audit firms should be scrutinised more leniently when auditing new, higher-risk companies.
Senior auditors from large accounting firms asked for lenient oversight when dealing with the audits of new clients during a call with audit watchdog the Financial Reporting Council, the Financial Times reported.
“These would seem to be precisely the type of clients that need oversight. What is going on that they don’t want discovered, is my first question?” Tim Bush, head of corporate governance at shareholder advisory group Pirc, told Financial News.
Prem Sikka, a Labour peer and emeritus professor of accounting at the University of Essex, called the idea a “preposterous suggestion”.
“Why would they exert more effort when they know that no one will be watching over them and auditor liability laws are poor as well? The firms’ proposals are a recipe for a race-to-the-bottom,” Sikka told FN.
Representatives from the Big Four accountancy firms, EY, KPMG, PwC and Deloitte, and three challenger firms, BDO, Mazars and Grant Thornton, attended the call, the report said.
KPMG, Mazars, Grant Thornton, Deloitte, PwC and the FRC declined to comment. EY and BDO were contacted for comment.
Suggestion to keep some audit inspections from investors
The FRC rejected a proposal from one firm that audits of new clients should be entirely exempt from audit quality inspections, the report said.
Another suggestion was that the FRC could inspect the audits of new or high-risk companies but the results would be excluded from the audit firms’ published audit quality results, the report said.
This would mean that shareholders – for whose benefit audits are conducted – would not have any oversight as to an auditor’s report of the financial affairs of a company in which they’ve invested.
The pleas for lenient oversight come amid intense scrutiny on the sector after a series of corporate and accounting scandals.
The results of the FRC’s probe into KPMG’s audits of outsourcer Carillion in the run up to its collapse are expected shortly.
The FRC said in July 2020 that it was concerned “firms are still not consistently achieving the necessary level of audit quality”.
Its sample of audits carried out by the major firms found that a third of audits fell below the necessary standard.
In recent years, audit firms have been reluctant to take on clients perceived to pose a reputational or regulatory risk.
Retailer Sports Direct struggled to find a new auditor after splitting with Grant Thornton, eventually appointing challenger firm RSM in 2019.
Mining firms Petropavlovsk and Ferrexpo appointed challenger firm MHA MacIntyre Hudson to audit their accounts after PwC and Deloitte respectively resigned as their auditors over the last two years.
London Stock Exchange rules require companies to file annual audited accounts or risk being delisted. If a company cannot find an auditor willing to take on the job, the business secretary has the power to appoint one under the Companies Act.
Auditors poor on fraud
Separately, Pirc has said it will urge investors to vote against the reappointment of PwC, EY, KPMG and Grant Thornton as auditors because it says they are not doing enough to combat fraud.
Pirc said a report from the International Auditing and Assurance Standards Board that said there was an “expectations gap” between what the public expected of auditors and what they were required to deliver was “incorrect”.
“There is no ‘expectation gap’ under the law of many countries including the UK,” Pirc said in a February letter to the accounting body.
Pirc said Deloitte, BDO and Mazars had made commitments to fight fraud but said it would vote against the reappointments of EY, KPMG, PwC and Grant Thornton until they changed their positions on the issue.
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