LONDON (BLOOMBERG) - The UK dominant accounting firms must separate their audit units from other businesses by June 2024 as the country's accounting watchdog reacts to shortcomings that led to the collapse of several companies.
The Financial Reporting Council is asking the so-called Big Four - KPMG, Deloitte, PricewaterhouseCoopers and Ernst & Young - to agree to operational separation to ensure audit practices don't rely on "persistent cross-subsidy from the rest of the firm," it said on Monday (July 6) in an emailed statement.
Auditors are under greater regulatory scrutiny than ever after a serious of high-profile lapses in recent years, with Ernst & Young's role in the collapse of German payments provider Wirecard now under the microscope.
"These final principles follow extensive discussions with the audit firms," the regulator said. "The FRC is now asking the Big Four firms to agree to operational separation of their audit practices on this basis and to provide a transition timetable to complete implementation by June 30, 2024 at the latest."
The guidelines aim to shield auditors from being influenced by other part of a firm's business "that could divert their focus away from audit quality," the regulator said.
"KPMG supports operational separation in the UK," Jon Holt, the firm's head of UK auditing said in a statement. "It is clear however that operational separation of the UK's audit firms is just the first step on the journey to restoring trust in UK Plc."
Spokespeople for Deloitte and EY were either not available or didn't immediately return messages seeking comment outside office hours.
"We share the FRC's objectives of improved quality and confidence in audit," PwC said in statement. "We will continue to engage constructively with the FRC on the complexity and detail of these principles.
Audit practice culture should encourage ethical behavior, openness, teamwork, challenge and professional skepticism and judgment, it said.
Profits distributed to partners should not "persistently exceed the contribution to profits if the audit practice," the FRC said.
The firms should submit an implementation plan by Oct 23 and the FRC will agree a transition timetable with each firm. It will then publish an assessment every year of how well each audit firm is complying with the principles.