City watchdog chair Charles Randell says Big Four needs to improve audit quality ‘as a matter of urgency’
City watchdog chairman Charles Randell launched a withering attack on the Big Four accountancy firms today, calling for the profession to address audit quality "as a matter of urgency".
In a speech marking 10 years since the start of the financial crisis, Randell said it was “very disappointing” to see that the Financial Reporting Council’s audit quality review this year highlighted a decline in audit quality from the Big Four accountancy firms.
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“Audited financial statements of a financial firm are the cornerstone on which the additional regulatory processes are built. For that reason, we need accountants to deliver high quality audited financial statements for firms,” the Financial Conduct Authority (FCA) chair said.
Randell said the audit profession needs to “step up its game” on approaching audits with sufficient “robust scepticism and challenge”.
“Bringing this scepticism and challenge to bear is the core purpose of audit,” he said.
Speaking on the tenth anniversary to the day that the US government took key US financial institutions Fannie Mae and Freddie Mac into conservatorship, he criticised the accountancy firm’s inability to predict future risk.
“Most if not all of the firms which failed had been reporting relatively robust financial positions right up to the point when they did fail, with financial statements signed off by their boards and large audit firms,” he said.
He argued that the current approach to audits, including the neutrality principle and the lack of forward risk measurement, makes it “inevitable” that “financial statements of firms will not be sufficient for regulators to do their job in setting capital”.
Randell stressed the importance of audit firms doing their jobs properly as “poor accounting records can cause consumer harm” and “firm failure can leave customers high and dry,” he said.
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“Behind the economic statistics lie tragedies of individual loss: loss of employment, loss of savings, loss of mental or physical health and, in some cases, loss of life,” Randell said.
His speech comes in the context of calls from MPs for the breakup of the Big Four after a string of scandals, including the role of audit firms in the failures of outsourcer Carillion and department store chain BHS
KPMG was criticised by MPs after signing off on Carillion’s accounts four months before the first of its profit warnings and less than a year before it plunged into liquidation, while PwC was blasted by MPs and fined £6.5m by regulators for signing off on BHS’s accounts in 2015 days before it was sold for just £1.