KPMG, Deloitte and the audit dilemma

KPMG, Deloitte and the audit dilemma

Following KPMG and Deloitte’s proposal to stop providing non-audit services to audit clients, the industry considers whether this move will be beneficial

There has been an array of audit scandals over the past few months, and this has forced a more public promise from the accounting industry for further action to be taken. Adding to their recent statements, both KPMG and Deloitte have backed a suggested ban on UK auditors selling extra services to audit clients. KPMG has made the decision to stop providing any non-audit services for FTSE 350 clients, unless it is essential; Deloitte has followed suit.

It has been reported that KPMG’s latest annual figures secured through working with FTSE 350 clients considered of £198m in audit fees and £79m in non-audit fees. For Deloitte, in the same period, it was £172m and £103m. This signals a marked difference in revenue made from the auditing process when compared to firms outside of the Big Four.

The Financial Reporting Council (FRC) has previously singled out KPMG due to the number of auditing scandals tied to the firm’s name over the past several months – this has prompted a deeper questioning as to the fairness of the current auditing ecosystem.

KPMG’s chairman has sighted the need to avoid “even the perception of a possible conflict” going forward.

The Competition and Markets Authority (CMA) has launched an investigation into the quality of the current audit systems and will be releasing a more official report next month, detailing what changes should be made. CMA has been under increasing pressure to separate audit and non-audit operations within the Big Four so that there are more opportunities for other firms.

“Scrutiny of the audit market has highlighted concerns around quality, independence, and choice,” PwC has claimed in a statement. “We believe it is important to look at these areas in a holistic way, with audit quality firmly at the heart of any reforms to the market. We are open to embracing change which serves the best interests of shareholders, companies, and the market.”

Several proposed changes have been circulating in both the media and within firms themselves, from market share caps to an independent auditor body, but a conclusive decision has yet to be reached.

PwC continued: “We will work with the CMA and other stakeholders to do what is necessary to restore trust and confidence in audit, by supporting measures that address issues in the market. We appreciate that further commitments to limit non-audit services to audit clients could be necessary to promote confidence in the independence of audit firms, particularly for those companies in the listed markets.

“As the CMA has noted, there are already measures in place to control the non-audit services that an audit firm can provide to a client (as part of the FRC’s Ethical Standard, which was revised in 2016). We look forward to understanding the CMA’s analysis of the effectiveness of these measures.”

Furthermore, a spokesperson from BDO said: “Since April, BDO has been calling for a move which prevents accountants from offering non-audit work to their FTSE 350 audit clients, unless it is essential to the audit itself. A restriction on the provision of non-audit services to Public Interest Entities (PIEs) is critical to restoring public confidence in the independence of auditors, and a move which would benefit the profession.

“We have also said to the CMA [that] we would like to see an 80% cap on market shares of the number of FTSE and public interest companies that the Big Four can audit. This would be both a positive and practical step towards improving competition and, unlike other versions of a cap we have seen, we would like to see this proposal implemented within a two to three-year period, and to include big private companies, as well as the FTSE 350.”

According to Deloitte’s response to CMA, there has been the suggestion that 20% of FTSE 350 companies should be audited by a firm other than the Big Four in five years from now. This would be an effective representation of a “seven-fold increase from the current position.” However, as Deloitte pointed out, this would mean that a firm outside of the Big Four would need to win at least 60% of all tenders in that amount of time to reach this 20% by 2023-24. Furthermore, the firm would then have to wait a further two years before these audits went “live”.

The firm has cited the fact that, in the US, the four largest accountancy firms audit 45-50% if the entire listed market; in the UK, the Big Four audit 75-80%, thus proving that there is a huge discrepancy. Deloitte has further outlined that splitting up the Big Four into eight smaller firms would not have an effective enough impact, for it would not increase choice to a vast degree and it could potentially undermine audit quality.

Unlike Grant Thornton, however, Deloitte does not believe that an independent body appointing auditors would be an effective change. Nonetheless, the firm continued: “Measures that will improve the transparency of the audit appointment and reappointment decision and that will stimulate great investor involvement in the tendering process and strengthen the links between audit committees and investors are welcome.”

In their response, Deloitte has also highlighted how they “[o]n balance, [they] believe that market share caps, if introduced for a set period of time, and judiciously planned and monitored, are the only effective mechanism for moving ‘from four to more’, within an acceptable timescale.”

Whether or not this is a move that will spark further action being taken by the other half of the Big Four (PwC and EY) remains to be seen.

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