The recent announcement regarding the decision by the Big Four firms EY, KPMG, Deloitte and PwC, and Grant Thornton and BDO, to launch sweeping reviews of clients and cull those that they consider to be potentially problematic is a reflection of what is going on across the industry as a whole.
There are various possible and valid reasons for this. Primarily, it’s about safeguarding reputation. The whole worth of these companies is based on their reputation. Clients go to the Big Four for their name, seal of approval and to work with the best and brightest in the industry. These firms employ rigorous training policies, for the finest minds – and any errors or bad press presents a damaging risk to reputation.
Recent events, which have attracted widespread media coverage, public interest and criticism, such as the collapse of Carillion, the Patisserie Valerie fraud probe and the concerns surrounding the corporate governance of Sports Direct have put these firms, and the industry as a whole, into the spotlight.
By safeguarding and conducting a risk assessment across the business – including looking at sectors which present the most risk, such as hospitality and retail, and the ethics and business practices of the clients, these firms are wisely and sensibly protecting their interest and reputation.
The increasing cost of audit
Auditing as a practice is considerably less profitable than in previous years. The Big Four firms are looking at their businesses with a strategic financial eye, and, although audit has always been considered to be the firms’ bread and butter’ it does not make the same margins as consultancy and coupled with increasing compliance and risk associated (as companies face increasing scrutiny over their finances); it does not have ‘profitability’ appeal.
The prospect of possible further legislative reforms which will force accountancy firms to separate their audit from their consultancy practice has positively encouraged this reaction to consider the cull. The situation is potentially untenable for them. From the perspective of a smaller firm, such as Goringe, we have, for some time been strategic and selective about taking on new audit clients; the Big Four are almost following suit.
The audit, despite its associated challenges, is a positive practice and should be viewed as thus. It gives a clear idea to the stakeholders that the business is in a good (or bad) place, and the red flag to showing up any potential problems which can be addressed and dealt with before they get bigger. It is therefore intrinsic to the process.
Have firms not been compliant?
The decision to cull audit clients is a sign that that audit firms are pro-actively attempting to reduce risk. Firms are tightening up their processes. And, while there will always be day to day issues with audit, these companies want to avoid any further audit scandals and risk to reputation. To date, The Big Four have mostly weathered the storm, despite controversy, such as with the recent case with KPMG in the US, where an employee was convicted of leaking information to help the firm achieve its annual inspection outcome.
Firms are now viewing the landscape with a watchful and mindful eye, conscious of the possibility and likelihood of hefty fines being imposed or losing their auditing license. Audit firms must comply with ICAEW guidelines, with an Annual Compliance review, which ‘requires a firm to monitor, at least once a year, how effectively it is complying with the audit regulations; and deal with any issues found on a prompt basis’ via a hot and cold file review.
Large firms appear to be still passing their annual compliance reviews, despite reports of multiple fines and high profile events where they are reported to be the auditors.
How to walk away from an audit
There are different stages of the audit lifecycle at which a firm can ‘walk away’. Firstly, the firm can make a decision not to pitch at all for the business. If they do go ahead, a risk assessment is conducted, with due diligence. For a firm’s current clients, there should be an annual review on the actions, and should something be spotted that makes the auditor uncomfortable, they have the option to resign from the client, sign off the audit accounts but include a commentary in the statement of opinion, or may refuse to sign.
With a looming recession and increasing pressure on accountancy firms to be compliant, transparent and diligent, it is imperative to employ thorough processes and only proceed with an audit client if the firm is fully confident in the risk assessment findings and ethical business practices of the client.
By Nicky Goringe Larkin, founder and MD of Goringe Accountants