December 11, 2018

EY, PwC Not Fans of Giving Up Non-Audit Services for FTSE 350 Audit Clients in the U.K.

After reports out of the United Kingdom earlier this month said KPMG will stop providing non-audit services for FTSE 350 companies it audits to “remove even the perception of a possible conflict [of interest],” we wondered if the other Big 4 firms in the U.K. would follow suit. Well, we have our answer.

The Big 4 firms submitted their responses and recommendations on matters affecting the U.K. audit sector, including non-audit work, to the Competition and Markets Authority for its statutory audit market study. The CMA launched its study in early October to find out whether the U.K. audit sector is competitive enough and whether the Big 4 firms are “too big to fail.”

In short, Deloitte supports a ban on all non-audit services to FTSE 350 audit clients, but didn’t commit to actually doing it like KPMG, while PwC was “meh” about giving up non-audit work and EY was like “nah, we’re good.”

Why are PwC and EY resisting such a ban? Maybe it’s because, of the Big 4 firms, they have the first- and second-highest revenues, respectively, from non-audit services for audit clients (PwC made £358 million in FY 2018 and EY made £255 million in FY 2018). Don’t wanna give that up!

In its recommendations to the CMA, PwC was wishy-washy about giving up non-audit services, saying “further commitments to limit non-audit services to audit clients could be necessary [emphasis added] to promote confidence in the independence of audit firms, particularly for those companies in the listed market where there is a marked separation between shareholders and management.”

PwC added that any new restrictions would need to apply to all firms that audit large U.K. companies, regardless of the size or nature of the audit firm.

EY doesn’t support new restrictions on audit firms providing non-audit services. Instead …

We support increased disclosure of the details of what is done within the audit and a clear description of any non-audit services provided by the auditor, so investors and other stakeholders can understand and make their own determination of the impact of these services, if any, on independence. We believe this is likely to lead to better decision-making by audit committees about the services they wish to be provided by their auditor. It also addresses an important point around the awareness of what non-audit services are being completed.

In addition, EY thinks reporting and disclosure should be expanded to include “the full range of audit and non-audit services that a company purchases from its auditor and the major audit firms in reasonable detail, including an explanation of why it has purchased any non-audit services from its auditor.”

Like PwC, EY thinks any new restrictions that are introduced should apply to all firms that audit large companies or public interest entities, “not just one set of firms or a specific section of any market.”

Deloitte, which has the least amount of revenue derived from non-audit services of the Big 4 firms, said a ban of non-audit services to FTSE 350 and large public interest entity audit clients will require a clear definition of “large public interest private companies” as well as a clear definition of “audit services.”

We would suggest that as well as the annual audit, this includes the half-year review, bond offerings, grant applications, reporting on historical financial information, work on offering circulars and similar services. All other services, with no exceptions, would be banned.

While Deloitte said it realizes there are still concerns around auditor independence in the U.K., instances in which conflicts of interest arise between the firms’ public interest audit responsibilities and the advisory services provided to non-audit clients are “very infrequent.”

KPMG told the CMA that it is “currently working towards discontinuing the provision of non-audit services (other than those closely related to the audit) to the FTSE 350 companies we audit,” but added that such a ban “would be most impactful if implemented within a regulatory framework.”

The CMA is expected to release a report on its initial findings by the end of the year and will present a full report in 2019.

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