Picture: 123RF/nonwarit
Picture: 123RF/nonwarit

London — Britain's accounting watchdog could ban accountancy firms from consultancy work for clients whose books they check, it said on Monday, stopping short of a break-up of the Big Four auditors.

Under pressure from legislators to toughen up supervision of accountants after collapses at outsourcer Carillion and retailer BHS, the Financial Reporting Council announced a new "strategic focus" to ensure that audit serves the public interest better.

PwC, EY, Deloitte and KPMG often provide lucrative consultancy work to the same businesses they audit, raising concern that accountants may not be willing to challenge management of those companies.

PwC was fined a record £6.5m by the Financial Reporting Council in June for failing to flag its concerns about BHS. Its lead partner recorded only two hours of work on the audit but 31 hours on nonaudit services.

"The review will include determining whether further actions are needed to prevent auditor independence being compromised, including whether all consulting work for bodies they audit should be banned," the council said in a statement.

The council will work closely with the Competition and Markets Authority (CMA) in this area, it said.

EY said it welcomed measures that would encourage new entrants into the audit sector, but remained fully committed to the multidisciplinary model combining auditing and consultancy.

Deloitte said it supported the council's review, but that a wider discussion about the future of auditing was necessary.

PwC had no immediate comment and KPMG declined to comment.

Going concern

Taking lessons from recent company failures, the Financial Reporting Council said it would look to toughen up requirements for auditors to determine if a company is correct in stating that it is a going concern, meaning it has sufficient resources to continue in operation for a year or more.

The review will consider if accountants should say publicly if they have doubts about "realism" in a company's statement on going concern, the council said.

The government has already ordered an independent review of the Financial Reporting Council after it was described by legislators as timid in its handling of accounting firms.

The review's findings are due to be published before the end of the year and could propose increasing the councils powers or a more radical restructuring.

The CMA has already heard proposals from the UK accounting sector, setting out temporary curbs on how many big listed companies the Big Four can audit.' The proposals are aimed at meeting legislator criticisms that the Big Four, who audit nearly all blue-chip companies, do not face enough competition and may need to separate their audit and consulting activities.

PwC said last week that a break-up of the biggest accounting firms would not improve audit quality or boost competition.

The Financial Reporting Council said that a requirement for companies to change auditors more frequently has actually increased the Big Four's market share of the top 350 companies.

It will issue a revised rule by the end of 2018 that would force auditors to check estimates of credit losses at banks more stringently after finding weaknesses in audits of banks.