The Financial Reporting Council (FRC) suggested the measure as part of its new strategic review aimed at increasing public trust in audit.
The regulator said today that its review will determine whether further actions are needed to prevent auditor independence being compromised, while working closely with the Competition and Markets Authority (CMA).
“There remains public concern about whether the provision of non-audit services undermines auditor independence,” it said.
According to the watchdog, audit firms – especially the Big Four – generate the majority of their fee income from non-audit services to non-audit clients (70% for Big Four firms in 2017; 60% for non-Big Four).
The Big Four last year earned a combined £2.1bn in fee income from audit clients compared to £8.4bn in fee income for non-audit services – of which, £1bn came from companies they already audit.
The FRC said the total fee income for public interest entity auditors was £12.6bn last year, with 83% of this (£10.46bn) going to the Big Four.
The Developments of Audit review will run in parallel with an independent review into the watchdog which is already taking place.
Sir John Kingman, chair of UK Research and Innovation and chairman of Legal and General plc, is leading the inquiry, which is due to be completed by the end of 2018.
In the meantime, the FRC said it has strengthened its enforcement capacity so that “we can conclude cases more quickly” and revised its sanctions framework to levy penalties “that reflect the gravity of the issue”.
In its own review, the regulator said it will assess whether companies’ statements on their longer-term viability should be enhanced and whether auditors should report publicly on their views of the realism of assessments made by companies.
It will also review whether auditors are undertaking enough work to conclude that information is not materially misstated.
The FRC said it is not confident that its public target of 90% of FTSE 350 audits requiring no more than limited improvements will be achieved by 2019.
“We continue to identify problems with insufficient challenge of management and professional scepticism exercised by auditors when auditing key judgement areas (for example, goodwill impairment or long-term contracts),” the regulator said.
Within the FTSE 350 market, PwC had the biggest number of clients (105), with audit fees of £289m and non-audit fees of £103.6m. KPMG followed with 91 clients. It charged £198m in audit fees and £79m in non-audit fees. Deloitte and EY followed with 87 and 58 engagements respectively, according to the report.
In the AIM market, BDO led the way with 138 clients, £10m in audit fees and £3.5m in non-audit fees. KPMG followed with 132 engagements, and Grant Thornton with 115.
The watchdog also said in June that it has reported a “deterioration in the quality of the audits that we inspected to an unacceptable level” at KPMG.
Similarly, in its annual review of audit quality across the largest accountancy firms the FRC found that the fall in standards was due to a failure to challenge management, a lack of scepticism and poor bank audits.
It added that in order to secure improvements in audit quality, it must ensure “audit firms’ leadership drives culture in the firms in ways that support quality and consistency”.
Stephen Haddrill, CEO of the FRC said, “This comprehensive reform programme addresses fundamental issues underlying falling trust in business and the effectiveness of audit, whilst also looking to ensure that the requirements on what companies say about themselves are fit for the future needs of stakeholders. If stakeholders are to have confidence in audit, they also need to have confidence in audit rules and regulation.”
He noted that in addition to the FRC’s reviews and the introduction of the programme, “we look forward to proposals from Sir John Kingman and the CMA”.
In response to the review, Stephen Griggs, head of audit at Deloitte said, “We are supportive of the FRC’s strategic programme.
“The current debate goes to a deeper question as to the purpose of audit and its value to stakeholders. This needs a wider discussion to consider what the role of audit can, and should, be in the future, especially as large companies continue to grow in scale, become increasingly technology-driven and complex, and global in their outlook and requirements.”