It comes after a string of corporate failures, including Carillion and BHS, led to calls for a shake-up of the sector
The Financial Reporting Council said the objective of the operational separation by the Big Four is to ensure that audit practices are focused on the delivery of high-quality audits in the public interest and do not rely on persistent cross-subsidy from the rest of the firm.
The firms must outline their plans to implement all 22 of the FRC’s principles by October 23 and have completed the measures by June 2024 at the latest.
The move represents the biggest shake-up of the audit industry in decades and comes after a string of corporate failures, including Carillion and BHS, which led to three government-backed reviews that recommended wide-scale reforms.
Regulators say that the companies’ lucrative advisory arms create a conflict with their auditing divisions as it encourages auditors to be restrained in order to protect consulting opportunities.
Sir Jon Thompson, the FRC’s chief executive, said: “Operational separation of audit practices is one element of the FRC’s strategy to improve the quality and effectiveness of corporate reporting and audit in the United Kingdom following the Kingman, CMA and Brydon reviews.
“Today the FRC has delivered a major step in the reform of the audit sector by setting principles for operational separation of audit practices from the rest of the firm.
“The FRC remains fully committed to the broad suite of reform measures on corporate reporting and audit reform and will introduce further aspects of the reform package over time.’
Under the new principles, the finances of audit divisions must be ringfenced with a separate profit and loss account and firms will have to introduce an independent audit board to oversee the practice.
The Big Four now generate the majority of their revenues from consultancy practices, with only around 20pc coming from the audit.
The post Auditors told to separate consulting work first appeared in The Telegraph on July 06, 2020