KPMG to abandon FTSE 350 non-audit services

KPMG is reportedly to become the first Big Four firm to cease non-audit work for FTSE 350 clients, according to leaked letter to its 625 UK partners, in a move intended to put it ahead of greater regulatory oversight

In the letter, UK chairman Bill Michael said: ‘to remove even the perception of a possible conflict, we are currently working towards discontinuing the provision of non-audit services (other than those closely related to the audit) to the FTSE-350 companies we audit.’

The move, designed to remove the potential for conflict in the 90 FTSE 350 companies it currently audits, comes in the wake of the collapse of Carillion, to which it was an external auditor before it collapsed in January 2018.

Speaking about the measures that KPMG anticipates will be brought to bear on the audit market, he listed: 'market share limitations; shared audits; sharing of skills and resources; removing barriers to mid-tier expansion/reducing financial disincentives; and measures to strengthen the demand side, including the transparency of the tendering process and the position of audit committees.'

The letter also suggests that KPMG will 'push further towards increasing the value and transparency of audit by working towards the adoption by all FTSE350 companies of "graduated findings" within audit reports.

'We were the first firm to include graduated findings in our reports and they have been welcomed by shareholders as providing transparency of our views on the judgments taken by management in preparing financial statements. Our intention is that graduated findings should become a market-wide practice', wrote Michael.

According to research conducted for Accountancy magazine, KPMG's total audit fees from the FTSE 350 in 2017-18 amounted to £198m and it only earned £29m in non-audit services. This means that its non-audit work is equivalent to 14% of its audit services, significantly less than its three-year average of 35%.

This compares with Deloitte's £43m (28%), less than its three-year average of 41%, and PwC's £71m, 22% compared to the £326m it earned from audit work. Currently least reliant of the Big Four on non-audit work is EY, which earned £18m (9%) compared to its £189m in audit work, a significant decrease compared to its three-year average of 36%.

This general decrease is attributable to increased restrictions. In 2016 the EU introduced a cap on permissible non-audit services ‘of maximum 70% of the average of the fees paid in the last three consecutive financial years for the statutory audit of the audited entity’, restricting the amount that firms could earn in this way.

The move would put KPMG in a more solid position ahead of significant regulatory interest in the audit sector. The Kingman review, an independent review of the Financial Reporting Council (FRC), the regulator for auditors, accountants and actuaries, is currently due to be produced before the end of the year. A second Competition and Markets Authority (CMA) market review into the lack of competition in the audit market also began in October 2018.

The move has support from Deloitte, who on 30 October 2018 issued a letter responding to the CMA’s invitation to comment, calling for ‘a ban on non-audit services provided to FTSE 350 and large unlisted public interest entity audit clients’. It said that it recognised ‘that in the UK there are still concerns around auditor independence. These concerns are not generally held elsewhere around the world, but given the UK environment we support a ban’.

KPMG has been contacted for comment.

Report by James Bunney, additional reporting by Philip Smith

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