Regulating the Accountancy Profession

There is only weak competition in this sector as all UK based international companies need to be audited by international firms, of which there are only four: Deloittes, EY, KPMG and PwC. Their collective share of FTSE 350 auditing had reached 98% by 2018.

UK-based Grant Thornton stopped bidding for audit contracts from the UK's largest listed companies in 2018.

And there are persistent complaints that the Financial Reporting Council (FRC) is very reluctant to take firm action against larger firms. For instance:

The FRC had to be forced by the Treasury Select Committee of the House of Commons to mount an inquiry into auditor KPMG's role in the 2008 collapse of HBOS which had failed only eight months after being given a clean bill of health by KPMG. Paul George, an FRC executive director and former KPMG partner, was said to have driven through a rule change which added the word 'significantly' to the rule that requires firms to 'fall significantly short of standards' before being censured, fined or banned. The rule change allowed the FRC to announce in September 2017 that KPMG had escaped censure despite the fact that KPMG had given HBOS a clean bill of health is large part because a number of stock market analysts pundits had 'buy' ratings on the bank, oblivious of the fact that the pundits believed the numbers that the auditors were signing off. The FRC's November 2017 report is here.

KPMG then acknowledged that the inquiry had "highlighted a gap between what society expects of an audit and what an audit has been designed to do". This is a fair point. Audits are basically designed to assure shareholders that a company is financially sound. Auditors do not accept any responsibility or accountability to customers, suppliers or wider society.

And the FRC announced, also in November 2017, that it intended that 'seriously poor' audit work by the Big Four accountancy firms would in future result in much larger fines - maybe over £10m.



Martin Stanley