The UK’s audit watchdog has proposed more stringent ethical rules requiring firms to be independent from their clients following a series of high-profile accounting controversies at UK companies, including retail chain BHS and outsourcer Carillion.
The Financial Reporting Council on Monday launched a consultation on “important changes” to rules designed to tackle conflicts of interest among auditors and limit the non-audit services firms can provide to clients.
The rules, if passed, could result in finesfor audit companies that breach them and come after calls to break up the “Big Four” accounting firms amid escalating criticism over the quality of their audits.
The FRC said it would introduce a public interest test requiring a firm to consider whether stakeholders such as consumers would view a proposed action as likely to affect its independence, instead of considering only what another auditor might think.
It comes after PwC was accused of ignoring conflicts of interest at listed audit client Staffline in March. One of the UK’s largest recruitment groups, Staffline delayed publishing its results in January and admitted to several potential accounting irregularities.
Staffline finance director Mike Watts and audit committee head Ed Barker had both previously worked at PwC, as had previous finance director Phil Ledgard.
KPMG was investigated by the FRC last year for its auditing of accounts at collapsed government outsourcer Carillion. KPMG signed off Carillion’s accounts in March 2017, four months before the contractor wrote down £845m and issued the first of three profit warnings during the same year.
The FRC said it wanted to limit the number of non-audit services firms can provide to audit clients defined as “public interest entities” — a definition that includes large UK-listed companies — by replacing a list of banned non-audit services with a much smaller list of permitted ones.
Mark Babington, the FRC’s acting director of UK auditing standards and competition, said there had been “concerns expressed that auditors selling non-audit services undermines their independence and objectivity because they are focused on commercial relationships rather than being the independent auditor”.
Audit firms will no longer be able to undertake recruitment services or act in any management decision-making role for the companies they audit. They will also be banned from undertaking tax and certain legal services.
Greg Hall, ethics partner at Mazars, welcomed the proposed change. “There was confusion before,” he said. “It was never a blacklist of things you can’t do; you had to use your own judgment and work out what you could and couldn’t do.
“In doing that, some [firms] might have pushed the boundary further than others and some are getting it unwittingly wrong, so [the new rule] is very helpful.”
The FRC last amended its ethical rules in 2016 and is updating them now in response to a pledge from chief executive Stephen Haddrill last year. The revision also follows a June overhaul to the global code of ethics that covers the accountancy industry.
Audit firms will also be banned from undertaking non-audit work on a contingent fee basis, an agreement in which the fees paid are dependent on the outcome of the work. The FRC said such deals resulted in perceived or real threats to firm integrity.
Mr Haddrill, said the FRC’s “audit inspections and enforcement activity continue to identify a lack of professional scepticism and independence as being key points of failure when things go wrong.
“Our changes will strengthen and clarify ethical requirements in the public interest.”
The consultation closes on September 27.