Auditor resignations up 21%

The number of auditors resigning from audits is up 21% in a year, as the Financial Reporting Council (FRC) puts firms under pressure to stop using audit as a loss-leader to get higher margin tax and consulting work

A total of 229 audit firms resigned in the year to 30 September 2019, up from 190 the previous year, according to analysis by Thomson Reuters, driven by an increase in audit tender activity.

Audit firms are being encouraged by the regulator to drop unprofitable clients from their client rosters, which may have helped drive the rise in audit resignations.

In November last year the new chair of the FRC, Simon Dingemans, blamed cross-subsidisation of audit and audit’s usage as a loss-leader for a fall in audit quality.

The Competition and Markets Authority (CMA) has also said that cross-subsidisation can create a conflict of interest for auditors. The CMA suggests that separating out audit and non-audit services, thereby eliminating cross-subsidisation, would reduce potential conflicts of interest.

In response to regulatory pressure to improve audit standards, audit firms are introducing more checks and an even higher level of scrutiny in audits.

This extra work is leading to a pressure on fees especially at those already loss-making clients – leading to more audit resignations, Thomson Reuters argues.

Brian Peccarelli, chief operating officer, customer segments at Thomson Reuters said: ‘It seems that audit firms are now looking far more closely at which clients they want to work for.

‘Audit firms have responded to regulatory pressure and are now pouring far more time and resources into audits. Doing this has an obvious impact on costs.

‘They are also investing heavily in AI, big data and other technology in order to improve audit quality and keep costs under control.

‘However, there is an increasing acceptance amongst regulators and the profession that audits must be properly charged for. With the FRC increasing the level of fines it imposes on audit firms it is also understandable that audit firms will want to review their relationships with “high risk” clients.’

The number of firms resigning from audits is rising again after steadily declining from a peak of 367 in 2014/15.

That previous peak in auditor resignations occurred when the FRC’s ‘comply or explain’ rules over mandatory retendering of audits for FTSE 350 companies every 10 years were reinforced.

The EU-driven Audit Regulation and Directive (ARD), effective in the UK since June 2016, had enforced a 20-year maximum mandatory rotation of audit firms handling public interest entities.

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