UK’s audit watchdog set to reclaim control over licensing of major accountancy firms
The UK’s audit watchdog is preparing to strengthen its powers to sanction Britain’s major accountancy firms.
The Financial Reporting Council (FRC) is readying itself to take back control over the registration of the UK’s auditing firms, sources told the Financial Times.
In doing so, the FRC would be given new powers to strip licenses from the companies that audit the UK’s major companies, if they carry out poor quality work.
The move would also bolster the accountancy industry regulator’s powers to punish the UK’s major auditors by giving the FRC new abilities to restrict firms from tendering for contracts.
The plans come as the FRC has faced criticism for failing to properly regulate large accountancy companies such as KPMG, PwC, EY, and Deloitte, following major scandals such as the collapse of construction contractor Carillion and café chain Patisserie Valerie.
The regulator is now preparing to announce its plans to reclaim control of registration imminently, in a consultation that could be held as soon as this week.
The new powers, which would give the FRC tighter control over the ~30 major accountancy firms that audit the UK’s 2,000 major public-interest entities (PIEs), could come into the force within months.
Under current rules, the FRC delegates powers for the registration of auditors to four separate professional bodies, including the industry-backed Institute of Chartered Accountants in England and Wales (ICAEW).
The current rules mean the FRC has few powers to sanction auditors with systemic issues, as the watchdog is only able to impose sanctions in response to specific failures.
The plans come British businessman Sir John Kingman called for the FRC to be given new powers, after he claimed the watchdog is “almost powerless” to address firm-wide issues of audit quality, in a 2018 report.
Proof in the pudding!
Speaking to Morning Wire audit industry expert Professor Atul Shah warned that even if the FRC is given new powers the watchdog is only likely to use those powers in a “very limited way.”
“Having power does not mean they will actually exercise it,” Shah said, as he noted the FRC’s enforcement record has been “very weak” in the past.
The academic suggested the FRC’s bid to reclaim licensing powers may be part of an effort on behalf of the regulator to boost its legitimacy and show it has teeth.
Shah noted that withdrawing the license of a Big Four auditing firm would come as a major hit to the UK economy, as he claimed the powers are more likely to be used on a sectoral basis.
The professor added that the efforts to strengthen its enforcement powers could be seen as an “exercise in self-preservation,” as the watchdog faces mounting criticism over its regulation of the UK’s audit industry.