Deloitte has pressed the firing gun on a wider overhaul of the sector after becoming the first ‘Big Four’ auditor to pick a standalone board that will oversee the break-up of its businesses.
Deloitte, EY, KPMG and PwC have all been warned by the industry watchdog that they must ringfence their lucrative consultancy arms from audit divisions, which generate only a fifth of profits, following concerns that auditors failed to properly challenge company directors about their accounts for fear of missing out on highly paid contracts.
Deloitte said on Friday that it has set up an audit governance board which from January will be responsible for “providing independent oversight of the UK audit practice” and ensuring an eventual split of the audit unit goes ahead. Under the new rules the firms do not have to sell any operations but must make sure they are totally independent.
The accounting giants have been told that the split must be complete by June 2024 and they are expected to outline how it will be achieved by Oct 23 this year. The measures come after three government-backed reviews recommended wide-scale reforms in response to a string of scandals that has battered the sector’s reputation.
Accountants were criticised for failing to spot any red flags in various audits before disaster struck, notably at Carillion, BHS, Thomas Cook and Patisserie Valerie. The aim of the reforms is to improve book-checking quality and prevent conflicts of interest.
Deloitte’s deputy chief Stephen Griggs, who has been made managing partner for Deloitte UK as part of the changes, pointed to further changes in the months ahead.
“While governance changes to audit businesses are a key element of audit reform, they must also be considered alongside a wider package of change, including in areas such as corporate reporting, the role of directors, the evolution of the audit product and the regulatory environment in which we operate,” he said.
The announcement of Deloitte’s plans comes days after it emerged that it was eyeing the sale of its restructuring arm despite booming demand for insolvency services. Sources told Sky News that executives working for the accounting giant believe its restructuring operations will struggle to grow while still owned by a major audit firm.
The accounting behemoth is said to be holding talks over a management buyout of the unit, which has around 350 staff and has been busy advising retailers facing disaster due to the coronavirus downturn.
Although the regulatory crackdown on accountants only applies to the so-called Big Four firms, others are expected to follow in order to win coveted FTSE 350 audit mandates. The UK’s fifth largest audit firm, BDO, has already indicated to the accounting watchdog that it expects to follow by ringfencing its audit business. Grant Thornton, the UK’s sixth largest auditor, is also preparing to ringfence its audit business.