Failure 4 All: The “Big Four” fail to meet audit quality targets

July 22, 2019

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2 min read

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What's going on here?

A report by the Financial Reporting Council (FRC) has revealed the Big 4 accountancy firms have failed to meet audit quality targets.

What does this mean?

An audit is an examination of the financial statements of an organisation ensuring they are an accurate representation. None of the top auditors have achieved the 90% target of good quality audits set by the UK accountancy watchdog. The damning report comes after a string of businesses started failing as a result of auditing firms failing to pick up on financial problems or fraud. These businesses include BHS, Carillion and Patisserie Valerie who have gone bust. 75% of FTSE 350 audits did not meet quality standards.

What's the big picture effect?

Public companies in the UK must legally have their financial accounts audited. This is to ensure they are “free from material misstatement, whether due to fraud or error”. The supposedly transparent accounts failed to flag up any issues about businesses on the brink of collapse. This led to these businesses going into administration and the losses of numerous jobs. This highlights the importance of law-abiding accountancy for business as they can have severe real-life consequences.

This report will fuel demands for a change in auditing law. For example, MPs have demanded a radical change after the failure of companies like BHS. PwC signed off on BHS’ accounts just before it went under, showing how such a change is clearly needed. The FRC’s report comes after the CMA’s report which advocated an operational split between consultancy and audit divisions of accountancy companies. With consultancy being more lucrative than auditing, there has been more focus put on consulting. As a result, this has led to low quality audits.

If the Big 4 are indeed split up, their legal services may be expanded. This is because there is no doubt of independence from their other services, giving more freedom to expand those legal operations. They could become more and more like law firms, with bigger resources. But if they do this, they will lose their USP: being embedded in the overall brand.

Despite several auditing firms being fined by the FRC in the past year, the organisation is seen as “toothless”. The government has announced it will launch a new regulator, the Audit Reporting and Governance Authority, with more powers. By doing this, the government hopes to improve the untrustworthy image of big businesses. These blows to their reputation are not good for the firms, nor are collapsing companies good for business confidence. Given this, reform is inevitable, but may have to wait until after Brexit.

Report written by Elizabeth Marshall

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