Raymond Doherty 30 Jan 2019 04:43pm

Big Four admit audit work “not good enough”

Leaders from PwC, Deloitte, KPMG and EY have admitted to MPs that the quality of their auditing needs to improve

Representatives from the Big Four were speaking at the Business, Energy and Industrial Strategy (BEIS) Committee’s inquiry into the future of audit in the UK.

In what was an occasionally tetchy session – after one exchange, chair Rachel Reeves MP said, “I know you’re speaking to politicians but I wish one of you could give me a straight answer” – the firms were in broad consensus on most of the key recommendations put forward by the recent Competition and Markets Authority (CMA) and Kingman reviews.

They all agreed that a market share cap was a good idea – but that other proposals would not help improve quality – namely joints audits or spinning off audit businesses.

Bill Michael, UK chairman of KPMG, broke ranks to say that separating the audit firms is the “right direction of travel” but not “an electrifying” ring fence.

In November last year, KPMG – after a turbulent 12 months for the firm including its role in the Carillion scandal – announced it would no longer perform non-audit work for FTSE 350 audit clients. Today the remaining Big Four all said they would follow suit in the near future; however, they agreed that while this would improve trust in the profession, it would not actually improve audit quality.

Michael, when pushed by Reeves, stood by the statement he made last year that KPMG had performed a proper audit on Carillion. Reeves brought up the recent suspension of Peter Meehan, the lead partner on the audit, and three members of his team. Michael said this was unrelated to the audit work itself.

“We went through a lot of soul searching as a firm,” he said, adding that he was “hurt” and “cares deeply” about KPMG’s failures.

EY was accused of “ignoring” the capital maintenance rules in the Companies Act in its audit of Domino Pizza.

Asked what Deloitte and the rest of the big firms being regularly fined by the regulator for poor audit work meant, David Sproul, CEO of Deloitte UK, said, “It shows that it’s not good enough.” He added, however, that the Big Four is “not a cartel at all” and that audit tendering has improved quality. Steve Varley, chairman, EY UK, admitted that his firm’s audit work could do with “significant improvement” while Kevin Ellis, senior partner of PwC UK, said there is “always room” to get better.

Michael said, “This profession is moving away from self-regulation to regulation.” Sproul added it was a “once-in-a-generation” opportunity to improve the audit market.

Challenger firms

Appearing before the committee before the Big Four chairs, were representatives of the challenger firms. They also found themselves facing difficult questions.

Grant Thornton CEO David Dunckley said that the CMA recommendations “as a package” could open the barriers to entry for challenger firms auditing the FTSE 350. “We have the capabilities to do it.” Jac Berry, UK head of quality and risk at Mazars, and Scott Knight, BDO’s head of audit, agreed.

Clive Stevens, chairman, Association of Practicing Accountants, however, was more sceptical. He thought the recommendations could take 10-to-12 years to get in place and that the issue of joint liability was something his members were most concerned about.

Views were mixed on spinning off audit businesses. Dunckley said it would not lead to better quality and would hurt profits. Berry was concerned that a lack of wider experience could reduce an auditor’s ability to perform the job well, but was in favour of it. BDO backed it with reservations. Knight said the profession must “get ahead of the regulations” and simplify it – that if you audit a business, you don’t offer any other services.

Dunckley, whose firm Grant Thornton is currently under investigation from the Financial Reporting Council for its audit of the recently collapsed café chain Patisserie Valerie, said that he couldn’t answer questions on the audit as there was an on-going probe.

Peter Lyle MP instead asked that if a hypothetical business had performed fraud similar to what is alleged at Patisserie Valerie, should its auditors not have spotted it?

Dunckley said that an auditor “is not looking for fraud” and that the system is “not set up for that”. He said there is a clear expectation gap for the market and public.

“So you’re delivering something you know is not satisfactory?” asked Reeves.

“It’s like being the principle of a school and not trusting Ofsted to do the inspection,” added Lyle.

Knight, however, said that an auditor should spot a “sizeable or material” fraud, while Berry said, “what the public expect is to be able to rely on a set of accounts”. Stevens agreed. “You should be able to pick up a major fraud,” he said.

Dunkley and Knight were both sceptical of joint audits. “It will lock in the current structure” – and in 10 years the market, dominated by the Big Four, will “look the same,” Knight added.

Mazars, which performs joint audits regularly in France where they are more common, was unsurprisingly more positive, arguing that quality can be increased.

All of challenger firms agreed with the findings of the Kingman review and recognised there are plenty of changes that can and should happen “quickly”.