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FRC issues reform warning to Big Four

The ‘Big Four’ may have their partner profits scrutinised following news that the Financial Reporting Council (FRC) is finalising reforms to its audit regulation. 

According to Sky News, Deloitte, EY, KPMG and PwC may now be obliged to pay their audit and consulting partners according to the profits made across their divisions, with payments made on a rolling five-year basis.

It comes as the FRC reportedly wrote to the firms confirming its plans to reform the audit sector, following a series of “high-profile” accounting failures, such as KPMG’s handling of the Carillion audits

The letter reportedly outlined further details of the measures that the regulator plans to introduce in order to “prevent cross-subsidy” between the different divisions within the firms going forward. 

According to one insider, the ‘Big Four’ accountancy firms have been notified about “a principle that profits to partners need to be consistent with their contributions to profits over a five-year period”.

The profit-sharing restrictions form part of a package of reforms being prepared by the FRC, with the government also expected to introduce legislation this year that will “trigger far-reaching changes” across the audit sector.

In addition, the FRC reforms will also introduce a requirement for a “substantial proportion” of the ‘Big Four’s’ work to be set aside for challenger firms such as BDO and Mazars, according to Sky News.

One source told Sky News that the FRC had set out the profit-sharing measure as part of an update on “operational separation” in a letter to the big four firms in the last ten days.

The regulator will also demand visibility over the accounts of the firms’ audit operations to scrutinise them for any possible cross-subsidy.

A spokesman for the regulator told Sky News: “The FRC continues to move forward with our project to achieve operational separation of audit practices.

“Our objectives are that audit quality should be the firms’ first priority, and that there should be no structural subsidy between the audit practice and the rest of the firm. We plan to publish the principles in the next month or so and to start implementation from financial years beginning in 2021.”

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