UK Audit Reform

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An open letter on the need for UK Audit Reform

In December 2018, Sir John Kingman delivered his independent review of the Financial Reporting Council (the “Kingman Review”).

Amongst his concerns were:

  • The timidity in the regulation of the industry
  • The closeness of the regulator to the businesses it regulates 
  • The fact that the current body is struggling to maintain trust
  • That there’s not enough scepticism and challenge from the auditors 
  • That the way the system is currently set up causes the auditing firms to consider the company being audited as their “clients” rather than the investors and other stakeholders.

Because of this, Kingman suggested a new body be formed to regulate the auditing industry with accountability to Parliament. He further suggested this body have new leadership and the new powers needed to underpin trust and confidence in the UK’s audit sector.

The Rt Hon Greg Clark MP, then Secretary of State for Business, Energy & Industrial Strategy responded to Sir John Kingman’s review by reflecting on the position of the UK as having a “world leading business environment making us one of the most attractive places to invest, start and grow a business”. He went further to say: 

“The government will take forward the recommendations set out in the Review to replace the FRC [Financial Reporting Council] with a new independent statutory regulator with strong powers”.

On 24 July 2019, the Rt Hon Boris Johnson MP
became Prime Minister.

Unfortunately, Brexit negotiations mired the first phase of his prime ministership and we noticed the UK Government’s declining momentum to push through audit sector reforms, as recommended in the Kingman Review. Subsequently, we began writing to the Prime Minister advocating for audit sector reform. We feel strongly that this is in the best interests of promoting the UK as a transparent, trusted and open place to do business.

This exchange of letters has led to the Department of Business, Energy & Industrial Strategy replying to us and restating their commitment to “acting on the recommendations of these reviews, including legislating to create a tougher, stronger regulator”. 

With respect to the legal and operational split of the Big Four [1] audit and consulting practices, the Department confirmed,  “The Government is carefully considering the CMA’s [Competition and Market Authority] recommendations”.

On 12 December 2019, Johnson won a UK general election with a convincing Parliamentary majority.

This majority gives the Prime Minister, his cabinet and the wider Conservative Party the ability to push through reforms to the UK’s audit sector which has witnessed repeated failings by the Big Four.

These failings have resulted from widespread conflicts of interest between audit and consulting practices and material deficiencies in the quality and reliability of audit reporting. The Big Four firms have routinely failed to identify, address and disclose material weaknesses in accounting practices for companies who have long been viewed as a core part of the UK’s heritage, including British Home Stores, Thomas Cook, Patisserie Valerie, Carillion, Rolls-Royce and BT.

Reform in the audit sector is needed to build investor and public trust in the financial resilience of British businesses and:

Promote Competition
Create Level Playing Ground
Eliminate Conflicts of Interests
Advance Auditing Standards

Now is the time for the Government to act.

Read our correspondence below.

[1] Refers to Deloitte, PricewaterhouseCoopers, Ernst & Young (EY) and KPMG
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