The head of one of the United Kingdom’s biggest accountancy firms has said the audit market is “clearly broken” and “trust needs to be restored,” though how that should be done is “not clear.”
Paul Eagland, managing partner at BDO—the U.K.’s fifth biggest accounting and auditing firm—says he supports moves to improve the quality (and reputation) of audits if controversial recommendations made in April by the country’s Competition and Markets Authority (CMA) are brought into effect.
One of the key proposed changes to improve competition and audit quality is to effectively bar FTSE companies from being able to use a Big Four audit firm as their sole auditor.
Instead, if large companies wanted to use either PwC, KPMG, Deloitte, or EY as their auditor, they would need to use a joint auditor arrangement whereby a smaller-tier firm, including BDO, would do some of the work (and be jointly liable for the results).
To avoid using two firms, an FTSE-listed company would need to choose a challenger audit firm—meaning an auditor outside the Big Four—to act as its sole auditor (if mid-tier firms are prepared to take on the work, that is).
Predictably, such proposals have not gone down well with the Big Four, which audit every company in the FTSE100.
The audit profession has come under close scrutiny and intense criticism from politicians and regulators over the past 18 months following a series of accounting scandals and corporate failures at the likes of Goals Soccer Centres, Patisserie Valerie, Carillion, BHS, and Thomas Cook that have highlighted alarmingly poor work and questionable ethics and judgment.
In a curious twist of fate, however, criticism of their work may result in even worse audits: Heightened awareness of reputational risks from audit clients has made firms reluctant to target large companies for future audit work.
All the Big Four firms, as well as BDO and Grant Thornton, have launched wide-ranging reviews of client lists to pick out those that put them most at risk, preparing the ground for a cull of clients.
Last year Grant Thornton said it would stop bidding for audit contracts from the United Kingdom’s largest listed companies following public and regulatory censure for the quality of work it did at companies including Patisserie Valerie and Interserve, which both went bust.
This August the firm resigned as auditor of Sports Direct, a company that has been mired in corporate governance controversies ever since it floated in 2007.
BDO’s Eagland, meanwhile, has said the firm—which has a heavy focus on private companies and clients listed on smaller, non-FTSE exchanges—would only engage with FTSE clients “when it is right for us.”
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