Audit scandals rendering profession ‘unattractive’ to newcomers
August 17, 2023
The FRC has overseen a major uptick in audit enforcement activity recently, with the regulator issuing fines of £33.3m in 2022, a 77% increase from the previous year
The string of high-profile audit failures in recent years have been the catalyst for significant industry reform, but the profession is at risk of appearing ‘unattractive’ as a result, according to Nicola Scarr, audit partner at Haines Watts.
In May 2022, the UK government announced it would revamp the country’s audit regime by implementing a new regulatory body, increasing the responsibility of large corporations, and diluting the monopoly of the industry’s Big Four firms.
Significant corporate collapses such as Carillion in 2018 and Patisserie Valerie in 2021, were key catalysts for the overhaul. KPMG, the auditing firm responsible for the Carillion audit, faced a £1.3 billion lawsuit for purported audit negligence in the beginning of 2023.
Scarr says: “It is important to understand and share when things go wrong, but the headlines can be a tough read. I always review the detailed reports to appreciate what has happened and take forward any learning, and I know we can all improve by doing that.
“Restoring trust in the profession with audit reform is welcome; the challenge for us is our clients are typically locally-owned SMEs but the revision of standards applies to entities of all sizes.”
This is echoed by Ian Graham, partner at Moore Kingston Smith, who says while it is not necessarily deterring people from entering the profession, it may prompt individuals to exit the industry.
“The continued relentless negative publicity and pronouncements around audit are without any doubt putting people off wanting to continue their career and potentially put themselves in that position.”
As part of the Carillion scandal, Pratik Paw, a former junior accountant at KPMG, managed to avoid a significant penalty and suspension for his involvement in the mishaps, receiving a “severe reprimand” instead.
The developments, such as revised quality management standards, are welcomed by Haines Watts. The firm claims that it encourages enhancements to internal communication and self-reflection, extending even to its trainee staff. This fostering has increased open dialogues among team members at every tier, Scarr added.
“We always strive for the best quality for our clients, but we are aware that we operate in an ever-evolving industry and processes, standards and markets in general are constantly changing.
“We debrief at the end of an audit with both our team and clients to see where we can improve and add value across the entire audit process. This helps foster a culture of continuous improvement, and welcoming feedback, at all levels.”
Audit fees rise by 14% for top 500 business
New research from Thomson Reuters has revealed that the audit fees paid by the biggest 500 businesses in the UK have surged by 14% in the past year, climbing from £1.12bn to £1.27 bn.
Graham expresses surprise at the figure being as low as 14%, given the challenges firms are facing due to new auditing standards such as ISA 315 – a directive aiming to identify and assess the risks of material misstatement through understanding the organisation and its environment.
The UK’s audit overhaul also compels FTSE 350 firms to carry out of a portion of their work in collaboration with a smaller ‘challenger’ firm. The measure is intended to help challenge the dominance of the industry’s biggest players.
“If the regulators are driving either individuals or firms out of the market, the impact that’s going to have on quality and price is obvious. Quality is going to go down and price is going to go up,” Graham says.
“The only solution is getting more firms or more individuals into that market, and that’s where I think the regulators have a role that goes beyond enforcement.”
The Financial Reporting Council (FRC) has overseen a major uptick in audit enforcement activity recently, with the regulator issuing fines of £33.3m in 2022, a 77% increase from the previous year.
Graham adds: “I think it’s more nuanced than just throwing the book at people publicly every time there’s a problem and to an extent it is necessary” to fine them publicly.”
“The FRC quite rightly are putting a lot of pressure on audit firms to make sure that quality is to the level that is required and expected, but I don’t think public enforcement action is the only or always the best way to do that.”
Will fees continue to rise?
The Thomson Reuters study also found that audit fees for the top 500 UK firms has increased for the last three years, and Haines Watts’ Scarr hopes they will begin to level out in the near future.
“I know it’s not yet been decided, but having adapted standards for less complex entities would certainly be welcome,” she says.
“The ISA standards are getting longer, with more bases to cover, which is appropriate for your large PLCs. But for SME clients at the other end of the scale it can be more challenging to manage, whilst maintaining value for our clients.”
Scarr believes the continuous growth and development of technology such as data analytics could help stabilise fees, but with the current talent gap it is difficult to predict
However, Graham argues that a continued upward pressure on audit fees is likely, but that it will depend at what market you are looking at.
“If you’re a FTSE 100 company you might start to see this levelling off slightly because that quality journey is closer to complete for the biggest firms. The largest audit firms have been working extremely hard to make sure they’ve got robust audit methodology that works for those largest corporations.”
“What’s required is for the regulator to recognise the differences between businesses and deal with them proportionately, otherwise, I think the cost increases that you’re seeing at the very top of the market are going to be repeated.”
[Accountancy Age]
