Accountancy body wants to inspect audited firms

The watchdog seeks more powers to tackle the 'big four'. Picture: TSPL

Stephen Haddrill, chief executive of the Financial Reporting Council (FRC), told Scotland on Sunday that the watchdog’s teeth would be sharper if it was able to delve more deeply into companies, rather than just their auditors’ statements.

However, the Department for Business, Innovation & Skills (BIS) has advised him that allowing this would require secondary legislation.

“If there is one area where we continue to feel that we need a bit more strength it is being able to get information out of companies,” he said. “It is not in order to regulate them, it is in order to regulate accounting and auditing.”

His comments came after the FRC claimed a major scalp in September when its case against Deloitte led to a £14 million fine. The auditor had failed to spot conflicts of interest when it advised the directors of MG Rover.

Although Deloitte is appealing the decision, Haddrill said he was “pleased with the initial judgment” of the independent tribunal.

But he admits the case against Deloitte “took time” – the car maker collapsed in 2005 with 6,000 jobs lost.

Haddrill cited a number of reasons for the length of the process – including the FRC’s lack of ability to investigate the company as well as its auditors. He said: “We haven’t had the ability to demand information from companies. We have the ability to demand information from the accountancy profession.

“We see the auditor’s side of the story but we can’t see what happens in the business, unless we persuade them to work with the investigation but that takes time.

“Generally they come on board eventually. But it has slowed us down in the past.”

The regulator has already been beefed up – in 2012 – to crack down on cases where the audit process has failed.

This month, the FRC published its reports on each of the “big four” after reviewing 100 audits that Deloitte, Ernst & Young, KPMG and PwC had undertaken in the past year.

Haddrill said that while audit firms had “been in denial”, they have improved – although they still have further to go.

He said: “What we found recently is we have seen better performance in the top end of the listed company market. But we haven’t seen quite the level of improvement we have been looking for further down the market.

“We have identified issues where we have got concerns with each particular firm. We think transparency is important to encouraging them to improve.

“Since the reform [of FRC’s powers in 2012] we have the powers to sanction them if we think performance has been weak. In the past all we could do was pass the case over to the professional body.”

He also noted that with the recent Competition Commission ruling that will see auditors of large firms review their contracts after five years and then require companies to re-tender them after ten years “it is becoming a tougher regulatory world” for accountants.

The FRC is also awaiting a report from the Financial Conduct Authority into the collapse of HBoS in order to launch a probe into the failed bank’s auditor, KPMG.