Breaking News | Commentary | Updates | Post-Publication Discussion
Update & News

Audit & Audit Market events in 2021 year-to-date (June 2021)

April 2021:

Senior KPMG executive faces scrutiny over M&C Saatchi audits. The FRC is making makes inquiries after accounting scandal at the advertising group

March 2021:
FRC delivers initial investigation report into KPMG’s 2013 audit of Carillion but it was not published.

The major event is the publication of the Department for Business, Energy & Industrial Strategy(BEIS) released its suggestions in a government white paper named ‘Restoring trust in audit and corporate governance: proposals on reforms in March 2021. As this is a consultation document, responses to the white paper close on 8 July 2021. How this fits in with the FRC views of corporate reporting is difficult to fathom. This will mean that the new ARGA (replacement to the FRC) with its new enhanced powers is virtually free to dictate any changes.

These proposals can be accessed by this link:

Apart from their 232 page document, there is an Impact Assessment (207 pages) and a summary of 30 pages dealing with:

a)   Financial reporting – 82 reactions/suggestions
b)   Quality and effectiveness of audit – 66 reactions/suggestions
c)   Audit market – 5 reactions/suggestions
Available with this link:

These cover all the suggestions of the Kingman Review, The Competition and Market Authority, and the Brydon Review. These can also be downloaded from the above link. Not all the individual recommendations of the three reports are adopted in the BEIS recommendations. Since this is a consultation, many of these will be argued by both listed companies and auditors. We expect the full set of recommendations to be watered down. The government may be afraid, in a Brexit world, that tougher rules and regulations would deter companies coming to the UK or investing in the UK. Existing companies may wish to leave the UK for listing purposes (despite Unilever’s move to Amsterdam being cancelled).

These proposals include new reporting obligations on both auditors and directors (even those without an accounting association) regarding detecting and preventing fraud, with boards required to set out what controls they have in place and auditors expected to look out for problems. In total the government estimate this would cost business £1.7 billion. We think this may be an underestimate but not by much. Well worth the additional cost spread over the current listed company criteria and about 2,000 additional firms.

In summary this government white paper can be summarised as:

Widening of the scope of the regulations and who is affected by the proposals

All listed companies in the two London stock market and the Alternative Investment Market. Additionally the largest private companies would be included.This would add around 2,000 new entities to the new regulations. Also an acknowledgement that stakeholders are much wider than investors, financiers, and shareholders.


  • Enhanced powers for ARGA (previously the FRC)
  • ARGA will have many powers over all reporting and audit matters.


  • Operational split of audit and consulting divisions of an audit firm. A stand-alone audit profession, independent of the professional accountancy bodies. Increased scrutiny of their work. The old FRC (but still current at time of writing) will push through the separation of audit and non-audit divisions.
  • Auditors will take into account a wider set of information including the whole of the narrative part of the annual report. This may include other information including climate and other environmental, social or stakeholder concerns.
  • A junior/senior dual audit which will enable the Big Four augmented by a challenger/mid-tier firms as a junior partner in the so called ‘managed shared audit’.


  • All directors to be held accountable for adequate internal controls – even those with no accounting qualification (a change from the old FRC). The proposals aim to make directors more accountable if they have been negligent in their duties, with fines or suspensions in the most serious cases of failings, including the lack of internal control to prevent fraud. This once again applies to all directors as does the sections immediately below.
  • A set of rules on dividends pay-outs and capital maintenance. Directors may be asked to justify any dividends or buy-back share scheme.
  • More details on forward looking statements. To the going-concern and viability statements, are replaced by three new resilience statements dealing with the short-run, medium run and longer run – the later time horizon to be decided by the directors. All such statements to be signed off by all the directors.
  • New rules governing non-executive directors (NEDs) and duties to be performed by them. As Sir John Thompson of the FRC said non-executive directors can’t just turn up and cash in. We certainly wanted a more professional approach for these NEDs given that they also have demanding full-time jobs elsewhere.
  • The possibility of a claw-back on directors’ remuneration for the largest companies. Directors’ remuneration would contain two-year clawback or malus provisions for serious misconduct, a material misstatement of results or error in performance calculations, failures of internal controls and risk management, reputational damage and unreasonable failure to protect the interests of employees and customers.


  • These proposals give investors better tools to exercise stewardship through:
    a)   An advisory shareholder vote on a company’s audit and assurance policy.
    b)   A right of shareholders to propose to the audit committee areas of emphasis to be considered within the auditor’s annual audit plan.

There will much discussion and these proposals will be picked over by all the interested parties and no doubt (as we have said) watered down or made more acceptable to the interested parties.

We think that the proposals should have contained more about the publication of forecasts (numerical and financial modelling) with directors believing in their own forecast including non-executive directors building and running a simplified financial model of their entity with several different time dimensions.

Helen Thomas, writing in the FT, ‘Long road to audit reform is littered with questions’. 18 March 2021, made the following criticisms:

  1. Lack of choice in auditors. “First, it is indeed “not healthy” that 97 per cent of FTSE 350 audits are undertaken by just four audit firms, especially as internal conflicts of interest and auditor rotation mean not every Big Four firm will be bidding for every mandate”. She did not like this senior/junior partnership is a halfway house between s single auditor and the joint audit requirement in France. The Big Four firms will still complain about duplication, logistical complexity, and rising costs.
    We agree but the solution is not to have joint audits in our view. See
  2. Second, she believes that the ‘tougher rules holding directors responsible for the accuracy of the numbers may yet end up a tad flimsy. The government’s three options in this area span a broad range of outcomes, from a simple director statement in the annual report to a fully vetted opinion from the auditor as to the effectiveness of the company’s internal controls’. Not quite the equivalent of US’s Sarbanes-Oxley regulations. We hope that this regulation will be strengthened over time.

Professor Karthik Ramannawiring in the FT on 20 March 2021 in article titled ‘UK audit reforms fail to address the real problem behind scandals’ claims that these proposals are inherently weak.

Alas, it has not been worth the wait. The proposals focus almost entirely on fixing “rules”, not rebuilding “norms”. The key idea seems to be that new regulations and regulators will succeed where old ones failed. But the trouble is not badly designed rules; it is that, whatever the rules, we lack a systematic culture in audit firms and corporate boardrooms to challenge chicanery when it presents itself. True, the accounting standards that enabled Carillion to avoid goodwill write-offs and instead pay out dividends are flawed, in that they give managers unverifiable discretion over accounts. We should fix them. But the standards do not impede auditors and independent directors in questioning management’s reporting judgments.

The FRC has made some changes to the principles following our analysis of the firms’ implementation plans:

  • To clarify that services provided to non-audited entities should be commissioned by those charged with governance at the entity or be assurance services for third party recipients.
  • To increase the minimum proportion of revenue within the ring-fence that must be derived from audit.
  • To confirm that the audit practice should not receive fees for introducing business to other parts of the firm and that partners in the audit practice should not be incentivized for sales passed to other parts of the firm.

Essar’s UK oil business hired auditor with just three accountants.
‘Essar’s hard-pressed UK oil business turned to an audit firm with only three chartered accountants to sign off on its accounts after Deloitte and BDO cut ties with the company. Essar Energy, a subsidiary of Indian conglomerate Essar Group, controls the Stanlow refinery near Liverpool, through Essar Oil UK. The facility supplies about one in six litres of fuel used on British roads and employs 900 people. Essar Oil UK, which is trying to raise funds to stave off crisis after a sharp fall in demand during the pandemic, is facing concerns over its governance and finances. Three directors have resigned in the past month and Lloyds Banking Group stopped acting as its main lender. Essar Energy, which reported revenues of $8.75bn in its latest accounts for the year ending March 2020, hired PBG Associates to sign off on its financial statements last year. The appointment of the small firm based in Hayes, Middlesex comes as the accounting industry faces questions over how to ensure effective audits of large companies that have been snubbed by major audit firms, sometimes over regulatory or reputational concerns’.

GT and Sanjeev Gupta
The administrator of bust finance firm Greensill Capital has been dragged into a storm over conflicts of interest after advising its biggest debtor, steel tycoon Sanjeev Gupta, on a string of deals.
Grant Thornton was appointed to handle the collapse of Greensill and recoup cash for its creditors after Swiss banking giant Credit Suisse froze a $10 billion (£7 billion) fund, tipping Greensill into insolvency. However, the mid-tier accountancy firm can also be revealed to have played a key role in the growth of Gupta’s $20 billion turnover metals empire over several years, advising him on deals in Scotland, Wales and France.

The partner who led KPMG’s audit of Carillion leaves the Big Four firm. Peter Meehan was previously suspended in January 2019.

February 2021:

Operational separation of audit practices:

The Financial Reporting Council (FRC) published principles for operational separation of the audit practices of the ‘Big 4’ firms in July 2020.  The FRC asked the firms to submit their implementation plans by 23 October 2020.  The FRC has reviewed these plans and discussed them with the firms individually and is now content for the firms to move to the next stage of implementation. The firms’ progress will continue to be closely monitored against the milestones in their plans and the FRC will provide feedback and challenge to the firms on their arrangements.

“Buy now, pay later” firms such as Klarna and Clearpay will be closely monitored by the UK’s financial regulator after the use of such services nearly quadrupled during the coronavirus pandemic, raising fears over consumer debt levels.

KPMG UK partners took a 11% pay cut amid Covid slowdown. This follows others have did the same. From an average of £640,000 to £572,0000 for their 582 partners representing a saving of £288 million.

In the US it is claimed that PwC didn’t break any audit quality records in its 2019 PCAOB inspection report, which was released on Tuesday. In fact, PwC’s audit failure rate in the 2019 report (for audits inspected in 2018) got worse.

The Financial Reporting Council (FRC) has given leading audit firms a record £43m in fines for sub-standard audits marking a threefold increase in one year, while individual partners have been hammered with £1.6m in personal fines.,around%20the%20%C2%A35m%20mark.

Consulting firm Deloitte’s is in hot water in China after one of its employees reportedly made a 55-page presentation on social media exposing the firm’s alleged accounting violations in China, including neglecting some of its clients’ abnormal financial spending, skipping auditing procedures, and fabricating figures.,spending%20and%20skipping%20auditing%20procedures.

The global chairman of PwC has pledged to “aggressively” review how the firm can better hunt for frauds following Wirecard and other accounting scandals.

Ministers and business leaders have raised concerns over the soaring cost of insuring British directors after prices more than doubled in the past year on concerns about corporate governance and pandemic-related claims.

Grant Thornton ‘failed to check Patisserie Valerie cash levels’. GT, it is claimed, failed to check cash levels.

January 2021:

Boohoo (claims of illegally low wages) and the takeover of Asda (Leveraged buy-out – private equity/Issa bothers bought a £7 billion company for less than £800 million) were much in the news.

KPMG resigns as auditor of Triterras, amid accusations that the Singapore-based fintech misled investors over transactions on its blockchain platform Kratos.

An interesting article for small accounting firm – though US may be useful for the UK small accounting firm. See:

The ICAEW released a site to suggest current and future directions for audit:

New FRC investigations and other events (November 2020)
6 November: Sanctions against Deloitte and a partner. Unnamed company. Found issues with audit of i) defined benefit pension scheme, ii) value of intangible assets. £326,500 fine.
30 October (FRC): published its inspection findings into the quality of major local authority audits in England. Found inconsistent auditee quality and found Grant Thornton and Mazars, required significant improvement.
30 October (FRC): a) KPMG and Silentnight; b) Findings into local council audit inspections raised new concerns. C) A senior executive at PwC has been identified in a £63m court case against the Big Four accounting firm in which it is accused of leaking confidential client information.
19 October (FRC): consultation on the proposed revision of its UK auditing standard ISA (UK) 240 (Updated January 2020) – The Auditor’s responsibilities Relating to Fraud in an Audit of Financial Statements.
16 October (FRC): Big Four’s fees for non-audit work for audited entities continue to decline

Auditing the ‘most ghoulish companies’ (November 2020).
There are two issues. a) Not only is there limited choice among the Big Four, but there is clear evidence that the Big Four and even the smaller challenger are unwilling to take on some audits, b) Secondly as Oliver Shah from the Sunday Times says:
“…do we really want small firms — possibly smaller than BDO or Mazars — taking on complex companies run by difficult founders, and sometimes becoming dependent on them?”

Reluctant audit firms (November 2020)
Deloitte, KPMG and BDO have declined to become the auditor for Lex Greensilll ahead of a possible float, the Financial Times said last week — despite a rumoured multi-million-a-year fee. Lex Greensill, is a leading financer of working capital finance and other supply chain finance. As such the company has lent substantial funds to the less than transparent Liberty House and Liberty Steel Group chaired and run by Sanjeev Gupta. As the Sunday Times succinctly put it:
“…the Australian financier with a ghoulish proclivity for helping the steel tycoon Sanjeev Gupta spin his financial spiders’ webs. Greensill’s eponymous supply-chain finance firm may count David Cameron as an adviser and Japanese giant SoftBank as its backer, but its reputation has scared off big accountants Deloitte and KPMG, as well as the challenger BDO.”
There is some background to this which includes some suspicion about the Gupta empire. GFG Alliance is the umbrella group that includes Liberty House/Steel, AlvanceAluminium and SIMEC renewable energy. The story goes:
“Greensill played a central role in the 2018 scandal in which Swiss asset manager GAM was forced to close a fund stuffed with illiquid bonds issued by Gupta’s companies. Greensill had arranged the securities, which were bought by star GAM fund manager Tim Haywood, who was later sacked for gross misconduct, including due diligence failings. Last year, Bloomberg said German regulator BaFin was broadly scrutinising Greensill over its exposure to Gupta’s family empire, GFG Alliance.” So the cross-selling of consultancy into audit clients has gone. The worst case that has come to light involved BHS where PwC carried out eight times more advisory than audit work for Sir Philip Green’s BHS in 2014.

Other companies to have difficulty finding an audit firm include Boohoo, which has suffered the departure of PwC and deemed by this Big Four firm as too risky to audit. Mike Ashley’s Sports Direct was ‘momentarily a member of this club until it managed to get RSM to replace Grant Thornton(GT), which had been unimpressed with the discovery of a potential €674m tax liability on the eve of its results last year’.

The new majority owners of Asda, the EG Group (owned by Issa brothers) has run into problems with their auditors, Deloitte, resigned due to governance issues. I suspect we will see more of such resignations as the pandemic stretches profitability and funding.

Rising audit fees (November 2020)
Although audit fees are rising rapidly, auditing is still not so profitable as consultancy. There is also the reputational risk and the heavier fines now imposed by the FRC on audit firms. So expect more problematic companies to have difficulty finding an audit partner especially as the pandemic has made the future uncertain. Though a large fee from a new client is ‘irrelevant if you’re at risk of being fined many multiples of that by the FRC when it goes wrong.’

In terms of audit fees just one possible outlier is PZ Cussons annual report for May 2020 showed an exceptional audit fee of £2 million up from an historical low figure of £0.5million (audit Deloitte). Is this just a pandemic abnormality or an increase which will become more normal with the new operational split of audit from consultancy and both divisions having to be stand on their own and be profitable? With PZ Cussonsthere may well have been good reasons for this increase. Or will this herald a new era of rapidly rising fees. May be a bit of both?

Can the smaller challenger firms cope? (November 2020)
The second issue is less clear cut though Oliver Shah thinks the answer is ‘No’. It is true that the smaller firms have had their fair share of auditing scandals. There is also the view that the challenger firms are unable to gear up on new technology and audit systems to cope with the larger audits. For example, Engine B is a new complex artificial intelligence (AI) system which will aid audits to spot fraud and to prevent further scandals. AI requires a level of sophistication and staffing which may be beyond the reach of the challenger firms who are not only in computation for IT personnel with the Big Four but also the big tech companies.

Oliver Shah also questions whether the smaller challenger firms (still quite large) want to maximise growth. Shah thinks that many of the smaller ones are lifestyle maximisers: the partners want to earn enough to pay the mortgage and their children’s school fees; they might not be particularly interested in ambitious expansion.”

This is reinforced by Grant Thornton (GT) deciding to end a long-running legal battle over its failure to expose a fraud at a former client, AssetCo, leaving it facing a bill of £28.6m. The FRC report into local council audits found two challenger firms, GT and Mazars, where the level of audit quality requires significant improvement.

ICAEW audit monitoring report finds a quarter of audits are substandard (October 2020)
The ICAEW which supervises more than 12,000 firms found that 18 percent of audits required improvement and 8 percent needed significant improvement. The annual inspection reviewed 960 audits from a wide range of businesses last year. It does not review audits of public interest entities, broadly defined as listed and large private companies, which are monitored by the FRC.
Audits typically needed to improve because they lacked sufficient evidence, reached inappropriate decisions in key areas, failed to challenge management,or lacked adequate documentation. Areas of particular concern included the audit of property valuations (little or no evidence).

Deloitte first with plans for break-up (October 2020)
Deloitte has become the first of the Big Four accountancy firms to devise plans for a new governance structure to comply with its regulator’s demands for a break-up of their operations.
The firm will establish an audit governance board in January that will provide independent oversight of the UK audit practice. The board will ensure that the firm complies with a plan by the Financial Reporting Council for the operational separation of the audit divisions in Deloitte, KPMG, PWC, and EY.

The Big Four have until the end of next month to tell the regulator how they plan to implement proposals announced in July. The regulator wants firms to pay auditors in line with profits of the audit division. It has told them to sever the financial links between auditors and other parts of their business. The firms will have to complete the separation by the end of June 2024.

FRC says companies must improve COVID-19 reporting (October 2020)
UK companies should have disclosed more information to their investors about the impact of the pandemic. The FRC  has found, in its first review of corporate reporting since the onset of the pandemic. In a study of financial statements covering periods to the end of March — across eight sectors including retail, real estate, and aviation — the FRC judged that most contained “sufficient” information on the effect of Covid-19 on performance. But some, especially half-year results, needed “more extensive disclosure” to help shareholders understand how the virus had changed the outlook for months and years ahead.

FRC Audit Inspections (October 2020)
In July 2020, the FRC ‘lambasted’ the UK’s largest accounting firms. The FRC’s Executive Director of Supervision, David Rule said:
“We are concerned that firms are still not consistently achieving the necessary level of audit quality. While firms have made some improvements and we have observed instances of good practice, it is clear that further progress is required. The tone from the top at the firms needs to support a culture of challenge and to back auditors making tough decisions.”
Basically, the FRC has criticised the UK’s biggest accounting firms for the ‘unacceptable’ quality of their audits after their review found one in three was substandard. The Financial Reporting Council’s annual inspection of the seven biggest firms — KPMG, EY, PWC, Deloitte, Grant Thornton, BDO, and Mazars — reviewed 88 audits, including those for 45 FTSE 350 companies. It found that 29 of the 88 audits reviewed required more than limited improvements, while seven of these required significant improvements. Of the FTSE 350 audits, 13 were found wanting, with two requiring significant improvements.

Select Committee urges more urgency on audit reform (October 2020)
Darren Jones, chairman of the Commons business select committee, said the business department needed to show “far more urgency” after it declined to give a date for primary legislation on audit reform.
The legislation is required to turn the Financial Reporting Council (FRC) into a new body able to impose greater sanctions in cases of corporate failure. The long-trailed Audit, Reporting, and Governance Authority will also have new powers to direct changes to accounts, require prompt explanations from companies, and in the most serious cases publish a report about the company’s conduct and management.

Wirecard (October 2020)
More and more information is coming to light. It seems that everyone warned everyone. There was a failure of the auditors, of the regulators, and of the German government. Everyone bought into the Wirecard success story which, as it happens, was built on sand.
It turns out that McKinsey warned Wirecard managent one year earlier to take immediate action on internal controls. But then management failed to act and then passed the consultancy project over to PwC. Nice, if you do not like the conclusions of your consultants, just hire another consultancy firm. Of Course, EY also warned that Wirecard that the KPMG special audit, delivered a few month before the collapse, risked misinterpretation and needed more information on payments group’s third-party business. Olaf Scholz, Germany’s finance minister, defended his handling of the Wirecard scandal insisting the authorities had done all in their power to uncover irregularities at the company. Something that is patently untrue. German politics was solidly behind Wirecard. There were also plans for Wirecard to takeover Deutsche Bank. Though it now appears that there have been whistleblowers from as far back as 2016.

The picture that emerges of the Wirecard businesses that did exist is a stark contrast to the one painted by former chief executive Markus Braun, who hailed the group as a highly profitable pioneer in the payments industry. It reveals the scale on which the company, Germany’s biggest corporate fraud in decades, also misled investors about its real businesses. In fact, the non-Asian business racked up huge pr-=tax losses.

The problem left local business and people scrambling as they were locked out of their payment processing systems. Cafés, restaurants, hotels, and mobile network providers were left with no payment processing systems after the Monetary Authority of Singapore, the de facto central bank, ordered Wirecard to cease payment services in Singapore.

Some good may come of this as PwC pledges to review fraud detection after Wirecard scandal shakes their industry. But shouldn’t they have done that anyway?

However, EY faces mounting backlash after Wirecard whistleblower revelation: one of the accountancy firm’s own employee’s flagged potential fraud at Wirecard four years before the company collapsed. Even they missed their own investigation in March 2017 (Project Ring).

FRC one again finds quality of all top audit firms unacceptable (July 2020)
The FRC’s Audit Quality Review team reviewed 88 audits across these firms and concluded that only two thirds of the audits were of a good standard or required limited improvement[1]. The individual reports for each firm (as well as the mid-tier and smaller firms) can be found on the FRC site.
Tabby Kinder of the FT[2] points out that its sharpest criticism was reserved for PwC, the UK’s largest audit firm by revenue, as well as KPMG and Grant Thornton. These are the firms have come under fire for their involvement in high-profile corporate failures at Thomas Cook, Carillion, Patisserie Valerie, and earlier BHS. The FRC focused their activities on the following issues: going concern and the viability statement, the other information in the annual report, long-term contracts, the impairment of assets and fraud risk assessment.
The Times referred to these results as damning[3]:
The damning results come amid pressure on the government to bring forward reforms of audit firms and regulation after a string of corporate collapses including Carillion, BHS and Thomas Cook. The delay has raised concerns at a time when Covid-19 has accelerated the risk of corporate failure.

FRC dictates operational split of Big Four (July 2020)
6 July 2020 the FRC announced its principles for operational separation of the audit practices of the Big Four firms.  A first in the world. The objectives of operational separation are to ensure that audit practices are focused above all on delivery of high-quality audits – in theory anyway.

Interesting that the existing FRC is initiating this split rather than the new replacement ARGA[4]. This am mean that the enhanced FRC will continue – perhaps. The timetable is:

  • An implementation plan should be submitted to FRC by 23 October 2020.
  • The transition timetable should be to complete implementation by 30 June 2024 at the latest.

The FRC 22 point plan[5] lays out the details of the operational split of the Big Four (PwC, Deloitte, KPMG and EY) audit/accounting firms – though their consulting divisions far exceed their audit counterparts (being only around one fifth of the total). There have been a series of reviews (CMA, Kingman and Brydon) since the collapse of Carillion in 2018 which has led the severe criticism of the Big Four.


The FRC’s plan seeks to ensure the Big Four pay auditors in line with the profits of their audits, ringfencing the finances of the audit division with a separate profit and loss account, and introduce an independent audit board to oversee the practice. This will significantly increase the cost of audits as there can be no cross-subsidy from the more lucrative consulting divisions.

The FRC stopped short of a full break-up of the firms such as the spinning off audit teams into independent legal entities, that had been mooted by some politicians in the wake of the collapse of Carillion. Since then there have been further high-profile corporate collapses, such as Thomas Cook, Patisserie Valerie, NMC Health, LCF, Kaloti (Dubai) and, most recently, German payments processor Wirecard. The challenger mid-tier firm Grant Thornton was the auditor for Patisserie Valerie and another failure Conviviality,

We fell that this however does not provide a sufficient number of auditors to provide choice – See our book Bhaskar K., and Flower J., with Sellers R., Disruption in the Audit Market: The Future of the Big Four. Routledge, 2019. Wes simulated the audit markets under a variety of different splits of the audit firms and tested for independence and quality. Our conclusions were that such an operational split is insufficient to improve audit quality.

Also such an operational split still maintains the inherent conflict of interest in audit market structure where auditors are paid by the very groups that hire them.

Tabby Kinder in the FT noted that[6]:

But some commentators said the measures did not go far enough. “It is a semi-split that is unlikely to be the last reform that will be needed,” said Erik Gordon, professor at the University of Michigan.
Others criticised the four-year “lag” for implementing the changes. “If this is held out as the solution to audit quality then we’re all kidding ourselves,” said one senior industry executive.
An individual at a Big Four firm pointed to the logistical challenges, calling the requirement for separate audit balance sheets a “nightmare” as it would require the firms to “untangle” central administrative costs.

Revisions to Going Concern, Risk and Viability statements (COVID-19)
15 June 2020 FRC
During the 2007-2009 crisis, we were told by a number of interviewees that a cross-sector wave of warnings did not happen, This is confirmed by Tabby Kinder in the FT[7]. The FRC obviously heeded her warnings that auditors have a backlog of annual reports that are likely to question the ability of companies in the hardest hit sectors during the pandemic to continue trading as a going concern for the next 12 months. Tabby Kinder writes:
A flood of going concern warnings or qualified audit opinions — in which an auditor says there are misstatements or that they could not obtain enough evidence to sign off the accounts with a clean bill of health — could spook markets.


There is also expected to be a rise in “emphasis of matter” audit reports, which highlight serious uncertainties around matters such as property or inventory valuations.Tabby goes on to report:

The head of audit at one large firm said some major businesses had approached the government’s department for business in recent weeks to complain that their auditors were putting too much pressure on them. “They have complained that we’re being overly prudent,” the auditor said, adding: “However, it’s clear that none of the stress tests we forced companies to do back in February and March look so crazy now.”
He said his firm was forcing all consumer-facing companies it audits to stress-test being closed until September and a phased recovery for a further 12 months. He said that travel and leisure companies had been told to “assume no European summer revenues and no winter sun revenues at all”.

So firms believe the auditors are putting too much pressure on them in what is often regarded as a pass or fail type test (going or not going concern). The FRC has clarified that there are ways in which the survival of a company can be graded with different possibilities.

The FRC responded with two reports: Covid 19 – going concern, risk and viability[8] and Covid 19 – resources, action, the future[9]

The reports consider that investors are fully aware that the levels of uncertainty are unprecedented and, to a large extent, outside companies’ control. The FRC encourage Boards of companies to consider plausible scenarios and report on how they intend to respond to these going forward. Examples of good practice reporting were included to assist companies.

Specific elements of uncertainty relevant to the next 12 months might include (but are not limited to): a) Timing of resumption of operations. b) Further restrictions that limit the return to normal operations. c) Restrictions placed on government (or other) capital. d) Timing and continuation of government schemes and support packages. e) The outcome of capital raising actions, discussions with banks, and landlords. f) Short-term impacts of pricing changes to revenue and expenses. g) Impacts on human capital, the supply chain and customers.

The FRC summaries of the these issues are provided below:
Going concern
Locating and obtaining short-term cash resources is often about building resilience and flexibility but, for some, it is ultimately about survival. In such circumstances, reporting ongoing concern and uncertainties becomes more important. The disruption to business models in the short-term might mean that the going concern assessment is more complex task. However, going concern is not a simple binary or pass/fail concept. A company can be a going concern even when one or more material uncertainties exist. In such circumstances what becomes important is the disclosure about the uncertainties and management’s consideration of these.


Risk reporting
Reporting by companies on principal risks provides investors with key information about the resilience and adaptability of a company’s business model and strategy to internal and external shocks. COVID-19 has created risks for many companies and caused a reconsideration of risk profile and appetite. Investors therefore want to understand how those risks have changed and how they specifically affected companies, and how management have responded.

Viability statement
The viability statement was introduced following the 2008 financial crisis to provide investors with a better view on the longer term prospects and viability of a company’s future. The current crisis is a test of the value of viability statements. Availability statement with realistic scenarios and clear assumptions provides boards an opportunity to communicate their longer-term prospects, even when the short-term outcome is less certain.

Breaking news June 2020

The Big Four audit firms earn their keep June 2020
Both KPMG and EY are to be congratulated on going against the market and corporate opinion in giving negatives reviews on probably what was the jewel of the Germany stock market. Frequently the Big Four may have passed private communications about their concerns in non-public correspondence with hope that explanations and/or action would be undertaken to rectify the situation. Whatever happened in private view the impact of these opinions sent the value of Wirecard into a dive and may be, threaten the survival of the company (and perhaps a share of their fees).

The Big Four and the Challenger Accounting/Audit firms June 2020
According to the Financial Times (FT), the BDO is doing well and is the fifth largest accounting firm by revenues, and now audits more listed companies than EY, Deloitte or KPMG – with 15 clients in the FTSE 250. KPMG’s descent into third place after the other Big Four from it first place in 2018 has been expected – given its troubles over numerous audits including Carillion. Though the Big Four have tied up the audits of the FTSE 100. Grant Thornton (GT) ran into issues and is in the process of retrenching (growing pains?).

Wirecard June 2020
Congratulations to KPMG and EY on their unwavering public confirmation of accounting issues in Wirecard. For several years, Wirecard had claimed no wrongdoing. Now with the ex-CEO have been arrested and a criminal investigation launched, the company has admitted missing cash of at least €1.9bn. .

FRC June 2020
The FRC closed its case on Tesco (£250m overstatement of profit in 2014) without any report or penalties. The FRC, however, launched an enquiry into PwC and KPMG in the audits of Eddie Stobart.

FRC is also expected to investigate into the audits carried out by PWC, EY, and by Oliver Clive & Co (a small, London-based firm). All separately signed off on LCF’s accounts without raising concerns.

Sanctions (but no fine) were imposed on KPMG for the audit of Foresight 4 VCT plc in relation to shortcomings in its audits of figures relating to the company’s distributable reserves.

Events during May 2020

For appendices to this book see:
For endnotes and references to this book see:

The After Coronavirus (AC) world is likely to be very different from the Before Coronavirus (BC) world and financial and economic life. This will have an impact on financial management, financial reporting and audit. Quite what will change and the extent of that change is dependent on the length, duration and severity of the virus.

Accounting/Audit industry during crisis
Headlines such as: ‘UK accounting industry faces worst crisis in a decade’ and ‘Accountants cut pay and put 700 staff on furlough’ may question whether the industry can ride through the coronavirus crisis – is the industry resilient enough. In total probably not. How about the Big Four? The Big Four, by and large, have cut the amount of profits that are distributed to their partners each month by up to 25% to build up cash reserves and help survive a downturn in work. Together the big Four employ over 74,000 people in the UK and partners earned an average of £720,000 in 2019 (numbering just over 3,000). Now, pay rises, bonuses and promotions are being deferred or put on hold. There is no question that the Big Four are resilient and will handle the crisis. The challenger mid-tier and smaller firms are tending to furlough staff. That said there may be some major changes including restructuring and down-sizing a little; and for the smaller firms more merging and takeovers.

Big Four troubles.
It seems that afar Deloitte and the PwC were the bad boys, in 2018 and 2019, KPMG were caught many times and went to the bottom of the group in terms of investigations and (in our view) errors in their auditing work. Now in 2020, it seems that EY has taken KPMG’s place.  EY has been ordered to pay $10.8m in compensation to a former partner who blew the whistle on a client in Dubai suspected of laundering money and smuggling gold. The judge found that EY and its Middle East associate firm had “embroiled” its former partner in “seriously improper conduct” and had allowed measures designed to obscure the audit findings. EY are still denying this.

Coronavirus threatens challenger mid-tier auditors.
The crisis has threatened their bid to catch up and break the Big Four stranglehold. The pandemic has forced challenger firms such as BDO, Mazars and GT, and their smaller counterparts, to act swiftly to cut costs and help survive a downturn in work and a squeeze on fees. As above measures include cutting staff pay, furloughing teams, and withholding profit payments to partners. The challenger firms seem to be worse hit that the Big Four who can rely or maintain some of their income streams and have cash buffer upon which they can draw.

Low regulation economy out?
The Boris Johnson government is said to be aiming for a lower regulation economy. That was before the election in December 2019. Now with a large majority this may change and there may be a more balanced approach to tighter regulation. Or may be not….

The push for audit independence (as at May-2020)
a)    FRC delays audit rotation due to coronavirus disruption. The FRC has made it clear that it is open to allowing extensions on auditor rotation and partner rotation by up to two year (on 10 year tender process and 5 years for the audit engagement partner).
b)   Coronavirus delays to audit reform.  Delays to non-urgent legislative reforms is to be expected to be a prolonged period of economic uncertainty. We think it will be delayed to 2021 at the earliest and legislation will be required for such remedies as the operational split of audit and consultancy, as will the official creation of ARGA. That said the beefed-up FRC has implemented more than 20 of the 83 recommendations set out in the Kingman review; and progressing with about 35 other measures recommended.
c)    Coronavirus delays to annual reports. The FCA asked companies not to publish their annual results because of the uncertainty caused by the coronavirus crisis. The FCA said that this was designed to ensure listed companies and their boards are not rushed into preliminary financial statements during the fast-changing circumstances presented by coronavirus. It said issuing updates instead was a sensible response to our request and entirely in line with our aims.
d)   FRC delays audit rotation due to coronavirus disruption. The FRC has made it clear that it is open to allowing extensions on auditor rotation and partner rotation by up to two year (on 10 year tender process and 5 years for the audit engagement partner).
e)    FRC tightens instructions on going concern and for auditors proof from clients. Company auditors have been ordered to be more sceptical and ask for more evidence before signing off “going concern” verdicts in annual reports. The FRC instructions came as listed companies were given an additional two months (we think this may be extended) to publish annual reports by the FCA. The FRC said it expected many more companies to have to admit to material uncertainties in their reports. Because of the unprecedented level of uncertainty, more companies would have to qualify their going concern statements.
f)    New FRC actions. This will require legislation from the government. Nevertheless, the FRC is taking its new powers (soon to be implemented with ARGA) to press firms to embark on a voluntary (or via legislation) break up as part of efforts to improve the quality in auditing. This includes making their audit operations financially independent businesses, with separate boards led by independent chairs. Audit costs and profits would be ring-fenced. Audit partners would no longer be remunerated from a shared pool of earnings that involved the firms’ consultancy earnings.
g)    New ARGA (Audit, Reporting and Governance Authority)to replace beefed up FRC (Financial Reporting Council) seems most likely –legislation to form ARGA with new powers due in 2020.
h)    The FRC/ARGA is to ban audit and consultancy work for the same client and extend this to the largest private companies as well as PIEs (public interest entities). This is discussed further below.
i)    An operational split between audit and consultancy divisions seem more likely either in partial or full forms. The CMA (Competition and Markets Authority [the competition regulator]) is now pushing hard through persuasion and/or legislation. The FRC may also impose new standards and regulations to achieve the same. Meanwhile the audit industry (Big Four and mid-tier firms) are considering a self-imposed split. However, Deloitte’s has published a response saying it is against such a split unless forced through legislation.
j)    Direct appointment of auditors. The CMA has warned of further drastic reforms of the audit market if the Big Four continue to oppose and undermine the proposed shake-up. The CMA claim  “The current set-up is a threat to the resilience of the entire system, in the event of a firm collapsing or withdrawing. The Big Four are too few to fail.” So the CMA are threatening one of our solutions in the audit market book and that is the direct (or independent) appointment of auditors (by ARGA presumably) – on the grounds of improving resilience and also audit quality.
k)    The Brydon Report is out and information and a critique of this can be found here:
Brydon Auditing Review

Other events (January 2020)
Banning of consultancy work for audit clients
The FRC issued (17 December 2019) a radical update to its ethical standards for audit firms. The update in effect has banned audit firms from providing a number of advisory services and consultancy services to listed companies and financial institutions – so called PIEs (public interest entities). The FRC fears offering these non-audit services may cloud judgment and make firms less independent. So this move is an attempt to strengthen auditor independence. This includes all recruitment and remuneration services and due diligence from the PIEs they audit. It also prohibited them from giving tax advice, advocacy and acting in any management role. The new guidelines set out a list of permitted non-audit services for auditors. They are a departure from the old standard, published in 2016, which instead told them which services were black-listed and thus prohibited. What is more these new powers may be backed by Government legislation.
Non-audit fees – i.e. consultancy – is a large earner for the Big Four with more than 80% of their fee income coming from non-audit work. If you take the Big Nine (includes GT, BDO, RSM, Mazars and Crowe) then the ratio is still 79% with the middle ranking Five earning around 71% of their fee income from non-audit work.
The FRC allows some exemptions – as always. Auditors will still be able to provide advisory services where the reporting is required by law or regulation, on the certain reviews of interim financial information, which do not count as part of the audit, and reporting on regulatory returns, client assets, government grants and internal financial controls. These exemptions are a little unclear and are often self-assessed and reviewed by the firm in question. That seems to be a mistake given the firms’ current track record.
FRC to extend the split to large private companies
The Big Four and the mid-tier firms all have lucrative contracts held by the firms, which have close consultancy and audit relationships with all the big unlisted UK companies as shown with the BHS and their auditors PwC – discussed our book Financial Failures & Scandals: From Enron to Carillion and its updatesThese relationships with the UK’s largest private employers will be curtailed under plans by the regulator to extend strict audit independence rules to businesses such as John Lewis, Swire, Ineos, JCB and Dyson. Surpassingly the government is considering giving the FRC powers to prevent the Big Four and the mid-tier firms from providing consulting and such items as remuneration and tax advice to the major private companies they audit.
Operational split again
The FRC has also been in talks with the Big Fourto draw up guidelines for the separation of audit and consulting divisions. These include changes to “governance, leadership, financials and remuneration” at the firms’ audit and consulting divisions. This self-imposed action would create a standard for the operational split, which would help the sector get ahead of any government-led overhaul of the profession.
CMA active
This concept has once again been given a new push by the CMA(Competition and Markets Authority [the competition regulator]). The Big Four have been told that a self-imposed break-up to reduce their dominance will not be enough. The CMA claim that legislation is needed so that the regulator has the power to design and enforce an effective split between audit and consultancy. The CMA is particularly concerned with ending cross-subsidies and profit-sharing between audit and consultancy. The Big Four counter this with ‘unintended consequences’ including lower audit quality and a lack of competitiveness. That said few are listening to the Big Four after the devastating crashes during 2018 and 2109.
So given a possible lack of government resolve, Andrew Tyrie, the head of CMA has adopted an unusual and unprecedented move. He has been meeting the heads of the big audit firms, as the pace of audit reform seems to slow. So persuasion is being used to see if there is any appetite to split their audit businesses from their consultancy arms. Comparisons may be drawn to the ringfencing of UK high-street banks: Andrew Tyrie was involved in implementing this regulation, which split UK lenders’ retail operations from their riskier investment banks, when he served as chairman of the parliamentary commission on banking standards. The CMA is also now threatening to take the appointment out of the hands for the firm s being audited and to appoint them directly by ARGA or some other body.
Banning not the same as splitting audit and consultancy
Banning audit firms from undertaking consultancy work for the same client is a very different type of regulation from splitting the audit and consultancy divisions. It seems that the government’s desire to split the Big Four may be waning a little. Hence the push by the FRC and the CMA representing a combination of regulation and persuasion.
Implementation of the audit reform (Brydon, Kingman, CMA et al)
Now how much of the Brydon and other is will be implemented is a moot point. There is no doubt that the UK’s largest accounting/audit firms have come under pressure after high-profile auditing failures and scandals leading to an environment under Theresa May that would have led to major change and tighter regulation. However, a big push by the FRC and the CMA may lead to a) self-imposed change (probably less likely) or b) through legislation.
What is not in doubt is that the FRC/ARGA is being strengthened and will be much more proactive and controlling of the audit firms and the audit process, as well as increasing its hold over financial reporting. That is a given – after the many financial scandals of 2018 and 2019. Of course, a number of companies are becoming unlisted and going private to avoid the rigours of those financial reporting and auditing regulations. The FRC has already signalled its intention to spread its regulations to the largest private companies as well.

What is not in vogue? (as at May 2020)

  1. Joint audits an original idea of the CMA for a Big Four and a challenger firm to perform joint audits. This is now a non-starter.
  2. New much enhanced governance codes. However, there may be tinkering and minor adjustments. There may be some tightening of regulations.
  3. A full separation of the accounting and audit professions as per Brydon. This is just a step to far of all concerned including the government.
  4. cap on the number of FTSE firms that the Big Four can audit. Just a non=-starter and would lead to many distortions of the audit markets.

What may very well happen? (as at May 2020)
Of course, the crisis may change everything but this is the current flavour of what may occur post AC.

  1. A new regulatory body ARGA to replace a beefed and more pro-active FRC but may be delayed.
  2. Through increasing regulations by the FRC/ARGA, more independence for auditors including banning of work for both audit and consultancy clients.
  3. Operational split of audit from consulting divisions in some form (voluntarily, peer pressure, or most probably through legislation [though now delayed because of the coronavirus]). Deloitte’s is the one in the Big Four holding out until legislation.
  4. The capping and controlling pay of audit partners by the FRC/ARGA.
  5. Further growth of the mid-tier challenger firms will occur through a simple lack of choice and conflicts of interest (applies to BDO, GT, Mazars, RSM and smaller firms). Though all the mid-tier firms seem to be running into their own issues and growing pains – so the problem of lack of sufficient well qualified audit firms with the necessary expertise and experience remains basically just the Big Four with some work trickling over to the mid-tier firms.
  6. Some (but not all) of the recommendations of the Brydon review dealing with the process of audit, and what is audited may be implanted by an enhanced FRC (or ARGA if it comes into existence).
  7. Changes to financial reporting depending on the end of the current crisis. This may happened over several years.

2019 events
For our analysis of events during 2019 please see the following files:
1a Current Audit Market Nov-Dec 2019
And for a month by month and event by event discussion please see:
1b Current Audit Market July-Oct 2019
1c Current Audit Market Jan-June 2019
The CMA (Competition and Markets Authority) final report was released on 18 April 2019 and has continued its recommendations from its update report on audit committee scrutiny (our view = ineffective), joint audits (expensive and does not add audit quality) with peer group review; and an operational split between the audit and non-audit practices of the Big Four.
See our response: CMA Final Report May 2019
Meanwhile the current problems of Sports Direct will rebound on everyone, though RSM did eventually replace GT. The collapse of Thomas Cook was inevitable and the FRC have now changed their going concern standard. Thomas Cook’s annual report is an excellent example of a fantasy fairy tale. See: our report on Thomas Cook and Sports Direct on:

And also the following files dealing with individual topics:
2 FRC updates
3 December 2018 Audit Market
4 CMA and Kingman reports update
5 Our response to the CMA Audit Market report [Jan 2019]