The UKs “big four” accountancy firms have been told to fence off their auditing operations as part of a drive to improve oversight of corporate finances in the wake of high-profile collapses such as Carillion and BHS.
The industrys regulator, the Financial Reporting Council (FRC), told KPMG, PwC, Deloitte and EY that it expects them to have separated their auditing divisions from the rest of their operations by June 2024.
The FRC issued the instruction amid a broader effort to overhaul the accounting profession that has led to three government-backed reviews but has yet to result in legislation.
The call to hive off audit work comes after one of the reviews, led by the City grandee Sir Donald Brydon, called for “urgent reform”, recommending that auditing be treated as a separate profession to accounting.
Accounting firms have found themselves the subject of intense criticism for perceived inaction in the years leading up to the financial collapses of the retailer BHS and the builder and government contract Carillion.
The twin financial failures have led to calls from MPs for the big four accounting firms to be broken up to reinvigorate the market and improve standards.
However, the FRC said it had discussed new principles with accounting companies and had told them to set out plans to improve their profession by October this year.
They include a provision that auditors be protected from influence that could come from the rest of the firm to reduce audit quality.
MPs have previously questioned whether accounting firms have an incentive not to ask difficult questions about the finances of companies that are also paying them for other services.
The FRC also said that the amount of profit distributed to the partners of any one companys audit practice should not persistently exceed the profits of the division itself.
They called for a culture that promotes ethical behaviour and professional scepticism, as well as a duty to work in the public interest and the interests of shareholders.
The FRC chief executive, Sir Jon Thompson, said: “Operational separation of audit practices is one element of the FRCs strategy to improve the quality and effectiveness of corporate reporting and audit in the UK 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.”
A Deloitte spokesperson said: “Deloitte has been consistent in our support for reform.
“We remain committed to playing our role in delivering change that embraces audit quality, improves choice and restores trust.
“Todays announcement is an important step towards addressing this but must also be considered alongside a wider package of reform, including in vital areas such as corporate reporting, the role of directors and the regulatory environment in which we operate.
“While delays are perhaps understandable due to Covid-19, it is crucial that we do not lose momentum.”
PwC claimed it had already taken action to bring its business into line with what the FRC was proposing.
“The proactive steps we took a year ago to create a distinct audit practice as part of our programme to enhance audit quality mean we are already aligned with many of the principles,” a spokesperson said.
Chris Cummings, the chief executive of the Investment Association, said improved audit quality would give investors more confidence in what they are told by the companies they own.
“By ensuring the culture and governance of audit firms is focused on audit quality, todays announcement is a welcome move which will help improve audit quality and ensure the audit process meets the needs of investors,” he said.