PwC’s newly-announced audit reforms have been slammed as “unacceptable” and “do not appear to go far enough”, according to Professor Prem Sikka and the Competition and Markets Authority (CMA). But PwC insisted that their reforms were never intended to resolve all the issues the audit sector faces.
PwC has announced a number of changes to the way their audit business was structured including an additional £30m investment to boost training, employee numbers and culture. The firm also announced that they would hire 500 experienced audit staff.
The news comes in the wake of a number of auditing scandals involving the Big Four, such as BHS, Carillion and Patisserie Valerie. The scandals have in turn led to calls from legislators for separation of the audit sector from consultancy services to avoid a conflict of interest.
However, Professor Sikka, an accounting academic at the University of Essex, gave a withering assessment of the changes, namely, that it was purely a PR exercise to fight against reform of the sector.
“What they are trying to say is, ‘look, we are changing ourselves, you don’t need to do anything’. But the problem is they are not really changing in any meaningful way.”
“I think it begs all kinds of questions. There’s certainly not a structural split, which is what we had recommended. They seem to be relying on some kind of a Chinese wall. I’m afraid that is not good enough,” says Sikka.
“The main reason [that it is unacceptable] is that in the recent past, all the Big Four have told us that they have Chinese walls, for example, they won’t sell tax avoidance services to audit clients. But numerous court cases have shown that that is exactly what they do. Therefore, anything less than a structural split, will not curb that temptation to sell other services,” says Sikka.
“Significant package of measures”
PwC strongly denied that this was a PR exercise, calling the changes a “major transformation programme” and a “significant package of measures” designed to improve audit quality.
“Our action plan isn’t designed to address all the issues the regulatory reviews are considering. The regulatory reviews are ongoing and we will continue to engage with that process. As we’ve consistently said, we are open to changes which will improve audit quality,” a spokesperson for PwC said by email.
Hemione Hudson, PwC’s head of audit, also says that it is important for PwC professionals to lead any reforms.
“It’s important that we think proactively about what we think is best for the profession, and that’s why we are making these changes ourselves at this time. But I also think it’s important that the recommendations of the various reviews are brought together. We are therefore, actively engaged with the Brydon review on the future of audit,” she says.
CMA not satisfied
While not as explosive as Professor Sikka, the CMA was also left unconvinced by PwC’s announcement, as the “deep-seated” problems within audit remained.
“The changes PwC have announced are welcome, but they do not appear to address all of our concerns. The recommendations we made to government are designed to tackle what are deep-seated and serious competition concerns in the audit market, where conflicts of interest persist and the UK is relying on 4 firms to review its biggest companies,” a spokesperson said by email.
“It is now for the government to take our recommendations forward to legislation and audit firms need to be prepared to adopt these reforms if they are brought into law,” they added.
ICAEW call for government action
ICAEW Chief Executive Michael Izza said in a statement that the changes were a “good start” but called on the government to act quickly and take control of the situation.
“Restoring public trust in audit cannot wait: while the momentum behind the reviews by Kingman, the CMA and now Brydon is encouraging, this is too important to leave to the uncertainties of next year’s parliamentary timetable,” said Izza. “It therefore makes sense for the government and the audit profession to get the process of reform under way, and to achieve as much as possible ahead of any new legislation.”
“Chartered accountants acknowledge this as a watershed moment and embrace the need for change. ICAEW is working with all parties to produce effective measures which will improve quality and increase choice in the market, while ensuring that audit meets the future needs of the British economy and wider society,” he added.