KPMG, PwC, others ordered to separate auditing from consulting services
The Financial Reporting Council (FRC) has directed world’s four biggest audit firms, which includes KPMG, PwC, Ernst & Young, and Deloitte to plan towards separating their audit services from their consulting services. The deadline for compliance with the directive is June 2024. The Big Four firms now reportedly generate the largest portions of their revenues from consultancy services.
According to a statement published on the FRC website, the directive was ‘world-leading’, and it became imperative to separate the firms’ operations towards ensuring that they deliver the uttermost quality audit services for the good of public interest.
The FRC said it reached the decision after engaging in extensive discussions with the Big Four. It was also agreed that the audit firms will submit an implementation plan to the FRC latest by October 23rd, 2020.
Commenting on the decision, FRC’s Chief Executive Officer, Sir Jon Thompson, said the FRC was committed to reforms on how corporate finances are reported, adding that further aspects of the reform package would be introduced over time.
“Operational separation of audit practices is one element of the FRC’s strategy to improve the quality and effectiveness of corporate reporting and audit in the United Kingdom following the Kingman, CMA and Brydon reviews. Today the FRC has delivered a major step in the reform of the audit sector by setting principles for operational separation of audit practices from the rest of the firm. The FRC remains fully committed to the broad suite of reform measures on corporate reporting and audit reform and will introduce further aspects of the reform package over time,” Thompson said.
FRC said it would be expecting the following outcomes by the time the operational separation officially takes effect starting from June 2024:
That audit practice governance would prioritise audit quality and protect auditors from influences from the rest of the firm that may try to divert their focus away from audit quality.
That the total amount of profits distributed to the partners in the audit practice does not persistently exceed the contribution to profits of the audit practice.
The culture of the audit practice prioritises high-quality audit by encouraging ethical behaviour, openness, teamwork, challenge and professional scepticism/judgement.
Auditors act in the public interest and work for the benefit of shareholders of audited entities and wider society.
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