UK watchdog asks top accountancy firms to ring-fence auditing

By Huw Jones

LONDON (Reuters) - Britain's audit watchdog has asked the top seven accountancy firms to press ahead with separating the running of their audit and consultancy services without waiting for a change in the law.

The Financial Reporting Council (FRC) told the firms it wants operational separation to improve audit quality and market resilience.

Last April, Britain's Competition and Markets Authority (CMA) recommended the move to stop conflicts of interest at EY, KPMG, PwC and Deloitte, the "Big Four" accountancy firms that dominate audits of major companies worldwide.

The FRC said Mazars, BDO and Grant Thornton were also sent a letter spelling out its expectations.

Regulators worry that firms could be tempted to go soft on audits to get more lucrative consultancy work. The CMA recommendation needs legislation to make it mandatory, which is unlikely until later in 2020.

The CMA proposed separate management, accounts, remuneration, chief executive and board for the audit arm, but it still allows auditors to draw on non-audit expertise of the wider company.

However, it stops short of a call from lawmakers to break up the Big Four, and the business ministry has yet to say if it will put the recommendation into law at a time when the government is keen to avoid damaging Britain's competitiveness in financial services.

Claire Lindridge, the FRC's director of audit firm monitoring and supervision, said the aim is to move the largest firms to operational separation faster than can be achieved through legislation.

"The FRC’s focus is to ensure audit firms put audit quality front and centre, with new independence and financial transparency guidelines to support this," Lindridge said.

"We expect the firms to put in place independent governance for the audit practice and ensure that the audit practice is appropriately ring fenced from the rest of the firm so that financial results are clear and transparent."

It underscores frustration at the FRC, CMA and among lawmakers over the speed of audit reform after three government-backed reviews that followed corporate collapses at builder Carillion, retailer BHS and more recently questions over auditing at cafe chain Patisserie Valerie.

The CMA also recommended that most of Britain's top 350 listed companies should hire two accountants to conduct a joint audit, meaning both firms would be jointly liable.

The accounting profession say this is unworkable and has put forward ideas for shared audits, whereby one auditor does the lion's share of the work, while a "challenger" checks parts of a company.

The FRC has also approached top auditors about how shared audits could be introduced before any legislation is in place.

The FRC itself is waiting for legislation to transform it into a more powerful regulator known as ARGA to drive through the envisaged reforms.

(Reporting by Huw Jones;Editing by Elaine Hardcastle)