KPMG to stop consultancy work for FTSE 350 audit clients

Irving Hamilton
November 11, 2018

Over the past five years, the Big Four's share of FTSE 350 auditing expanded from 95% to 98%, in spite of a series of supposedly stringent reforms from the European Union and United Kingdom aimed at tackling a lack of competition in the sector, since the 2008 financial crisis.

KPMG has come under particularly heavy fire recently for the standard of its auditing, which the FRC said last month had seen an "unacceptable" decline in quality.

Both firms are responding to a review of the sector by the Competition and Markets Authority (CMA), which is now looking at ways to break-up the sector.

United Kingdom chairman Bill Michael revealed the move in an memo to the firm's partners seen by City A.M.

Two of the world's biggest accountancy firms have backed a ban on United Kingdom auditors selling extra services to their audit clients, setting the stage for a huge shift in the embattled sector.

Now, as the Big Four looks to take control of the narrative, which has become increasingly hostile toward its dominance of the UK auditing and advisory scene, an exclusive report from Sky News has revealed that KPMG has informed its 625 UK Partners it will now phase out all but essential non-audit services for the 90 FTSE-350 companies which it serves as auditor.

Latest annual figures show that Deloitte earned £103m in non-audit fees on top of £171m in audit fees, while KPMG earned £79m in non-audit fees on top of £198m in audit fees for FTSE 350 clients.

Deloitte also suggests a cap on market share for parts of the market, and a stronger governance structure.

PwC said it was "open to embracing change" and recognised that further moves to limit non-audit services to audit clients "could be necessary".

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The commitment is a significant one, and if adopted more widely across the "big four" firms would potentially affect billions of pounds of revenue earned each year by the quartet of Deloitte, EY, KPMG and PwC.

The accountancy firm KPMG will stop providing non-audit services to big listed companies whose finances they are inspecting after coming under intense pressure over perceived conflicts of interest.

Michael wrote: "The roots of our profession lie in a fundamental need for trust, assurance and confidence in the capital markets ..."

Such a development, already deployed by KPMG, provides greater detail to investors on auditors' views of a company's accounts, lifting a veil on opinions now shared only privately with audit committees.

But the accounting industry has faced a lot of criticism in the last few years over whether their verdicts on companies' accounts can be trusted.

Clark said it was "right to learn the lessons and apply them without delay" of scandals including the collapse Carillion and BHS, which cost thousands of jobs.

Specifically, the FRC is looking into whether consulting work performed by an auditor on a company it is auditing should be banned to "prevent auditor independence being compromised".

There have also been demands from some quarters for the auditing industry to be broken up.

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