Analysis - Regulation - Big brother visits the Big Four

Inspectors from the UK's newly strengthened accounting watchdog are quizzing audit partners at the big firms. What will they unearth, asks Chris Evans.

The Big Four are currently being inspected by the newly strengthened Financial Reporting Council (FRC). This is the first time that UK firms have been subject to such rigorous and thorough inspection.

Like its counterpart in the US, the Public Company Accounting Oversight Board (PCAOB), the FRC is at the heart of a new focus on tighter corporate governance following scandals such as Enron, WorldCom and Parmalat.

The question is: what will the FRC find? The scope and depth of the inspections will become clear only after they have been concluded.

US influence

The FRC cannot help but be influenced by the recent findings of the PCAOB when it conducted its inspections of the Big Four's 2003 audits.

In a statement, the PCAOB said that it found 'significant audit and accounting issues that were missed by the firms, and identified concerns about significant aspects of each firm's quality control systems'.

Sir Bryan Nicholson, chairman of the FRC, has stressed that the UK inspections will 'eke out any wrongdoing'.

The Audit Inspection Unit (AIU), which is a part of the Professional Oversight Board for Accountancy (POBA) and comes under the auspices of the FRC, will probe the Big Four's audits over a period of six to nine months to ensure they comply with audit and ethical standards and to establish information about their client base.

Fieldwork at KPMG, PricewaterhouseCoopers and Ernst & Young has already started, and the AIU is due to inspect Deloitte later this month.

Inspection costs

The inspectors have been hand picked from a wide range of industry sectors and are paid well for their troubles.

'We need to employ staff with the appropriate level of experience and seniority to deal with these large audits and clearly that has a price attached to it,' Andrew Jones, AIU director, said.

The Big Four are being impacted by the FRC's more robust approach. 'The fees that we pay to the ICAEW have increased, in part, as a result of these inspections,' a KPMG spokesperson said.

Jones pointed out that the Big Four are also required to provide accommodation for the two or three inspectors that arrive at each firm. Over a potential nine-month period this could prove to be a costly business.

Their audit files are then scrutinised and their senior managers and partners who worked on the audits are questioned as to their methodology.

Disciplinary threat

Any recommendations made by the AIU as a result of its inspections must be taken on board and acted upon. Otherwise the firms face the threat of disciplinary action.

POBA director Paul George told Accountancy that they have procedures they can follow when taking action against a firm. 'First of all we issue a report to the audit registration committees of the accountancy bodies which can then require the firms to undertake certain action, or impose sanctions if they wish.

'At the moment we are undertaking routine audit monitoring of the quality of audit; we are not going through a detailed account checklist to make sure all the relevant disclosures have been made.

'But it may become apparent to us during the course of looking at the auditors' work that there are concerns about certain aspects of the accounts that the Financial Reporting Review Panel might be interested in.'

POBA is expecting to have statutory powers once the Companies Audit Investigation Community Enterprise Bill is enacted in April next year.

The mid-tier firms have these inspections to look forward to next year, followed by any other firm that audits the FTSE 350.

Jones said: 'Going forward into next year there will be a growth and expansion required in our numbers by about 50% to deal with these inspections.'

More information about the accountancy profession's regulatory structure, including the bodies mentioned above, can be found at

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