In principle, company audits must be carried out on any public body, FCA regulated business and most companies unless they are exempt. The exemption threshold means a company must have at least 2 of the following: an annual turnover of no more than £10.2 million, assets worth no more than £5.1 million, 50 or fewer employees on average.
The audit industry has been under review for some time and
this scrutiny has intensified since the collapse of Carillion the construction
and outsourcing firm in early 2018.
The industry is dominated by the “Big Four”, Deloitte, EY,
PwC and KPMG, who audit almost all of the FTSE 100 largest companies. Despite
their dominance other accountants have also come under the spotlight such as
Grant Thornton who were auditors of Patisserie Valerie that went bust recently,
apparently due to a £40 million fraud.
Mr Dunckley, CEO of Grant Thornton told MPs on the business,
energy and industrial strategy committee “we are not looking for fraud and
we are not looking at the future and we are not giving a statement that the
accounts are correct. We are saying they are reasonable, we are looking at the
past, and we are not set up to look for fraud.” MPs were not impressed. Should
they have picked up the fraud as part of their audit? What is their level of
accountability for failing to spot the fraud?
One of the contentious issues raised has been a suspected
conflict of interest between auditors’ auditing and consulting arms.
In 2018 PwC, was fined £6.5 billion for its
“inadequate review” of now-defunct department store BHS’s books.
In April 2019 the FRC (Financial Reporting Council) fined
KPMG £6m and “severely reprimanded” them, telling them to undertake
an internal review over the way it audited an insurance company, Syndicate 218,
And in May 2019 the FRC fined KPMG another £5m and
again “severely reprimanded” them after they admitted misconduct over
their 2009 audit of Co-operative Bank.
KPMG must be feeling the heat as it was also the auditor for
Carillion, which collapsed with debts estimated £1.5bn.
Since the Carillion collapse the CMA (Competition and
Markets Authority) has been investigating and announced its recommendations in
It concluded that there should be:
* A split between audit and advisory businesses, with
separate management and accounts
* A mandatory “joint audit” system, with a Big
Four and a non-Big Four firm working together on an audit
* Regulation of those appointing auditors
The CBI criticised the proposals saying they could add cost
and complexity for business with no guarantee of better outcomes and could
restrict access to the skills required to carry out complex audits.
For smaller businesses, including those below the exemption threshold, company audits can be an effective test of a company’s accounts and are a useful tool for directors in assessing their business’ health.
The worry is that the seemingly endless question marks,
fines and “reprimands” issued to large firms and their presumed conflict of
interest between earnings from consultancy and from audit work could undermine
confidence in the audit function and in the many smaller accountancy
practices that diligently carry out audits.