Following the recent failing of auditors KPMG in relation to their management of construction giant Carillion among other recent ‘scandals’, the UK audit watchdog, the Financial Reporting Council (FRC) has suggested a ban on non-auditing services provided by auditing firms.

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What goes wrong?

The FRC has identified issues with the current quality of bank audits and questioned whether auditing firms are challenging management enough, particularly when also providing non-audit services to their audit clients.

An argument as to why this might happen is ‘over familiarity’: a firm providing multiple services to the same company and receiving large fees for said services is under risk of becoming overly reliant on that particular company and therefore may be tempted to smudge results of audits to ensure the company is able to continue to function and pay the auditing firm.

For example, in March 2017 KPMG vouched for Carillion’s purported £150m of profits, despite these proving to be incorrect shortly after. KPMG earned around £1.5m per year working for Carillion, plus £200m in audit fees in 2017 from 91 of the biggest quoted companies in the UK, leading to some questioning whether they were sufficiently independent. Naturally, KPMG is now under much harsher scrutiny by the FRC.

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Following the 2016 Audit Regulations and the FRC’s review of the Ethical Standard, the scope for auditors to provide non-audit services to clients has been reduced. However, these firms are still able to provide some services to their audit clients, resulting in a continued risk of these firms becoming too close to the companies they audit and losing their independence.

What happens next?

Using outsourced accounting services such as alongside a separate, independent auditing firm ensures your books are as transparent and accurate as possible so as not to fall into the trap of Carillion, and other failed companies, who have allowed their auditors to become too close and overly-reliant on their fees for non-auditing services.

Currently, the FRC is working with the Competition and Markets Authority to discuss whether there will be a full ban on audit firms providing non-audit services to their clients, plus whether they will develop a strategy for separating accountancy and auditing services in order to maintain strength and trust in the auditing process.