The Big Four accounting firms will have to put their United Kingdom auditing and consulting practices in separate business units by 2024, but may keep them within the same parent companies, under regulations announced today by the Financial Reporting Council.
The measures by the U.K.’s chief regulator of accounting and auditing firms follow a series of financial collapses among companies that had survived auditors’ scrutiny. The changes stop short of the chief change sought by many critics of the current system, which would force auditing and accounting firms to completely disentangle themselves at the corporate level. But among other things, the new regulations will require that profit distributions to partners who run audits represent only profits made through audit work.
The Financial Times reported today that audits generate about 20 percent of the revenue for many large accounting firms.
The changes, which are described by the FRC as “principles for operational separation,” were posted on the regulator’s website today. Accounting firms must detail their plans for complying with the regulations by this fall.
Sir Jon Thompson, CEO of the FRC, said in a prepared statement: “Operational separation of audit practices is one element of the FRC’s strategy to improve the quality and effectiveness of corporate reporting and audit in the United Kingdom following the Kingman, CMA and Brydon reviews. Today, the FRC has delivered a major step in the reform of the audit sector by setting principles for operational separation of audit practices from the rest of the firm. The FRC remains fully committed to the broad suite of reform measures on corporate reporting and audit reform, and will introduce further aspects of the reform package over time.”
The FRC listed two objectives for the new rules in the document containing them: “Improve audit quality by ensuring that people in the audit practice are focused above all on delivery of high-quality audits in the public interest” and to “improve audit market resilience by ensuring that no material, structural cross-subsidy persists between the audit practice and the rest of the firm.”
Today’s announcement did not come as a surprise. The FRC notified the firms of its intent to compel changes in March.
Last year, the FRC said the Big Four firms, as well as some smaller firms that nonetheless are major players, had failed to meet audit tests.