KPMG U.K. Is Giving Up Non-Audit Work on FTSE 350 Clients. Will the Other Big 4 Firms Follow?

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So, Sky News broke some pretty big news in the United Kingdom earlier this morning regarding the House of Klynveld:

KPMG is to cease undertaking non-audit work for the FTSE-350 companies whose accounts it supervises, becoming the first of the ‘big four’ firms to make such a pledge in the aftermath of scandals surrounding the collapse of Carillion and BHS.

Sky News can exclusively reveal that KPMG told its 625 UK partners on Thursday that it would phase out all but essential non-audit services for the 90 FTSE-350 companies where it serves as the auditor.

The Financial Reporting Council, the U.K. accounting watchdog, is considering banning the Big 4 firms from providing consulting services to the largest companies they audit, saying “there remains public concern about whether the provision of non-audit services undermines auditor independence.”

It’s not too surprising that KPMG would be the first of the Big 4 firms in the U.K. to make this move, as it has been slapped around more by the FRC this year than a $2 hooker. Back in June, the FRC called KPMG’s decline in audit quality “unacceptable” and said auditors at KPMG “don’t challenge management enough, aren’t sufficiently skeptical and are inconsistent in their execution of audits.”

An FRC review of 16 audits carried out on firms in the FTSE 350 index revealed that half of KPMG’s audits required some or significant improvement. KPMG was fined £4.5 million by the FRC in early June over its botched audit of Quindell.

Then in July, KPMG U.K. Chairman Bill Michael got hammered on social media for praising the “hard work and commitment of the Carillion audit team” despite the firm playing a role in the construction services company being run into the ground.

KPMG earned roughly £1.5 million annually as Carillion’s auditor, with millions of pounds more earned from non-audit work, according to Sky News.

Michael sent a briefing note to KPMG partners this morning that said, in part:

“[T]o remove even the perception of a possible conflict [of interest], we are 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.

“We have also been clear that this would be most impactful if implemented within a regulatory framework for all FTSE350 companies and we will be discussing this point with the [Competition and Markets Authority] in due course.”

The CMA launched a review of the U.K. audit sector in early October to find out whether it’s competitive enough and whether the Big 4 firms are “too big to fail.”

According to an Economia report, KPMG’s decision to stop non-audit work for FTSE 350 clients is expected to be part of its recommendations that will be sent to the CMA for its audit sector study. But it is understood the firm’s decision is taking effect immediately. The CMA’s findings are expected to be published by the end of this year.

KPMG declined to comment on the Sky News report, but according to Economia, the firm expects its Big 4 rivals to also cut out FTSE 350 non-audit work. So the big question is: Will they?

Of the Big 4 firms, KPMG had the third-highest revenues from non-audit services for audit clients, with £221 million in FY 2017 (FY 2018 revenues won’t be released until December), which is behind PwC’s £358 million in FY 2018 and EY’s £255 million in FY 2018. Deloitte had roughly £215 million in non-audit revenues.

Just a hunch, but I think Deloitte and EY will be next to follow KPMG’s lead. But I could see PwC being assholes about it. Bob Moritz told Reuters recently, “Various people are providing this relatively easy answer to split up [firms’ audit and consulting operations], but we do not support it.”

Of course he doesn’t, not when the firm is raking in nearly £360 million in non-audit services.

What do you guys think?

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