The work of the “Big Four” will be more closely monitored in Great Britain in the future.
(Photo: Reuters)
Dusseldorf The UK government unveiled its plan for reforming corporate reporting and auditing on Tuesday after months of consultations. The British want to create a new regulatory authority. This is to monitor and control the accounting in the companies and the work of the auditors.
The new authority, called the Audit, Reporting and Governance Authority (Arga), will have far-reaching powers. For example, it is to gradually introduce mandatory shared audits, in which, in addition to a large auditing company for the group, smaller service providers can also audit subsidiaries. The authority also has the power to limit the market power of individual large audit firms.
The British government has dispensed with a legal provision to split up large auditors in case of doubt. Critics had called for such a step to prevent conflicts of interest within the auditing companies. The “Big Four” – PwC, EY, KPMG and Deloitte – operate not only the audit business but also management consultancies under one roof.
This model has come under criticism in the course of the many accounting scandals in recent years. The big examiners fight back against the compulsion to separate. The British reform now at least provides that Arga can order an operational separation of the two businesses in case of doubt.
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Even in the ranks of the “Big Four” it is currently being discussed whether a split would not be the better way for further development. Such plans by EY came to light last week: The audit firm is considering spinning off the audit business into a separate, independent entity. This should also strengthen the consulting teams, who see their business restricted due to increasing legal regulation of the auditors.
>> Read about this: After accounting scandals like Wirecard: EY is working on the spin-off of the audit business
With the reform, London wants to increase confidence in company balance sheets and reports. According to the report, reliable corporate reporting is essential for well-functioning financial markets, corporate investment and growth. It enables all interested parties to make a well-founded assessment of performance and corporate management.
However, several major corporate failures and accounting scandals in the UK have “caused serious economic and social damage and have called into question aspects of the system of corporate reporting and governance,” it said.
More competition among accountants
In Germany, the federal government reacted last year with a new law intended to strengthen trust in the integrity of the financial market. It was a reaction to the Wirecard scandal. The so-called FISG provides for a faster rotation of the examiners and their higher liability. The Bafin becomes the central supervisory authority for corporate accounting.
Arga will take on this role in Great Britain in the future. However, its sovereign territory goes beyond that of the Bafin: it is also the supreme supervisor of the work of the auditors. In Germany, this continues to be done by the independent Apas authority, which is based in the Federal Ministry of Economics.
>> Read about this: After this Wirecard shock: How the auditors want to get better
The new rules in Great Britain also include stronger reporting on the effectiveness of internal control systems in companies. Arga will monitor companies’ reporting practices more closely and set new standards. The British do not want a commitment to so-called “joint audits”. Two auditing companies work on the same balance sheet certificate according to the four-eyes principle.
The envisaged “Shared Audit” is a weakened version of this. In this way, the British want to introduce medium-sized auditing firms to the large mandates and thus ensure more competition. In Germany, both options are already available on a voluntary basis. However, many companies shy away from joint audits. “Shared audits”, on the other hand, are isolated.
The Institut der Wirtschaftsprüfer (IDW) does not consider regulatory intervention based solely on the design of the auditor market to be expedient. This also applies to the requirement for shared audits being considered in England. IDW board spokesman Klaus-Peter Naumann gives a mixed assessment of the British plans: “We are already making progress in Germany with the stronger integration of corporate management and auditing, as Great Britain is planning,” he told the Handelsblatt.
But he sees important elements that could further fuel the debate in Germany about balance sheet reports. In the future, companies in the UK will have to make a well-founded statement about how resilient they see themselves to external influences and how they specifically prepare for such risks. “This goes far beyond the risk report required in Germany and creates even more transparency,” says Naumann.
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