Under a new government proposal, large publicly traded UK companies will be required to appoint an auditor other than the Big Four firms or delegate some of their audit work to a smaller firm
FREMONT CA: Honing in at the dominance of the Big Four firms, the U.K. government announces plans to overhaul the country's audit and accounting sector. The changes will give a new regulator audit oversight authority and expand company directors' responsibilities regarding internal auditing controls. As per the plans, British companies in the FTSE 100 and FTSE 250 stock indexes are expected to hire an auditor other than the Big Four—Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers—or outsource a portion of their audit work to a smaller audit firm
The Financial Reporting Council, which presently governs audit and accounting in the United Kingdom, will be replaced by the Audit, Reporting and Governance Authority, a newly constituted body. Furthermore, ARGA will be given the authority to mandate that audit firms keep their audit and non-audit functions operationally separate.
The FRC notified the Big Four in 2020 that this separation would happen by June 2024. EY is considering splitting its audit and advising functions, considering the concept is still in its early stages and requires agreement from the firm's global partners
The government announced publishing a draft of the UK audit reform bill during the current parliamentary session, which ends in April 2023. The proposal would then be subject to standard parliamentary procedure, requiring a vote. The government is looking to expedite the process, but it will still take at least two years before a law is enacted.
Under the reform proposals, authorities would have the authority to sanction board members of large businesses who fail to meet their legal obligations in the areas of reporting and auditing, a break from current rules that only directors who are also accountants are subject to fines. However, the government abandoned a previous proposal to hold board members personally accountable for failing to oversee internal financial reporting controls. Instead, a provision slated to be introduced to the UK corporate governance code, a handbook for firms' conduct that directors can comply with or explain why they aren't, will require directors of large public companies to justify why they believe internal controls are sufficient.
Even with the so-called "comply or explain" option, the revisions have been pointed out, and that companies and directors should be aware of, as attempts to explain away noncompliance are unlikely to be well received by investors and other stakeholders.
Certain elements of previous proposals were played down by the UK government, including giving the country's audit watchdog authority over audits of private companies with more than £500 million in annual revenue, or roughly $630 million, and more than 500 employees. Instead, in addition to publicly traded companies, the regulator will have oversight over private businesses with more than £750 million in annual revenue and more than 750 employees.
The revisions have been in the works for years, with pressure mounting to overhaul the audit sector following a string of scandals involving several companies that went bankrupt in 2018. The Institute of Chartered Accountants in England and Wales, a professional accounting organization, described the changes as "halfhearted.” Lessons from Carillion and other recent firm failures have been overlooked, with little emphasis currently on improving internal controls and updating corporate governance.