PwC plans audit overhaul to stave off break-up threat

In a bid to stave off demands for the break-up of Big Four audit firms, PwC plans to spend £30m a year on a significant transformation of its audit business, with a raft of measures designed to address growing concerns from regulators, but the firm will not hive off its audit business

The overhaul will retain the integrity of the Big Four’s audit business within the wider firm and there are no plans to restructure the business into separate entities. The focus will be limited to investment in training, improving governance and audit quality, with plans to hire 500 additional auditors. 

‘A multidisciplinary firm is the best option to ensure audit quality as we need to access highly-trained specialists in a wide variety of disciplines,’ Hermione Hudson, PwC’s UK head of assurance told Accountancy Daily.‘That doesn’t mean we are not looking at our own governance. We absolutely recognise there is a clear need for change, which is why we are ensuring that our governance model is clear, transparent and supports the public interest.’

The move comes as the Big Four auditors come under increasing pressure to improve their audit standards and remove areas of conflict, with the threat of joint audits and break-up of the UK’s four largest audit firms being considered by the government following the Competition and Markets Authority’s (CMA) review of the audit market, which recommended the largest firms should separate audit from other services and consider joint audits with smaller competitors in order to build capacity and improve access for mid-tier audit firms.

Last summer PwC was handed a record £6.5m fine by the Financial Reporting Council (FRC) over its audit work for retailer BHS which collapsed a year after being sold as a going concern for £1. The FRC described PwC’s reporting as ‘incomplete, inaccurate and misleading’.

PwC said the additional £30m annually will be targeted at training, people and technology initiatives. These will include a doubling of its the face-to-face training programme for all experienced auditors, and increasing by two thirds the number of specialists in its audit quality control team.

The audit team will be expanded with the recruitment of 500 experienced auditors across the UK and it is creating a new national digital audit team, focused on the development and application of innovative technologies to improve audit quality.

As part of the overhaul, PwC says it is undertaking a comprehensive review of the entities it currently audits, ‘to ensure the firm achieves a return that allows continual investment in and focus on quality’. 

According to the Accountancy Daily FTSE 350 Auditor Surveys, PwC earned £277.6m from audit fees for entities listed in the FTSE 350 and reporting through to May 2019.

At the top level, it audited 39 companies in the FTSE 100 earning £257m in audit fees, and handled four of the top 10 audits in terms of complexity and fee income - HSBC, GlaxoSmithKline, Lloyds Banking Group and Vodafone Group - for year end 2018. 

PwC has also commissioned Karthik Ramanna, professor of business and public policy at the University of Oxford’s Blavatnik school of government, to produce an independent paper on what a culture of challenge means for auditors in 2019.

Hemione Hudson, head of audit at PwC UK, said: ‘Over the last year, we have been listening to the views of a wide range of stakeholders about the future of audit - exploring how it needs to change to meet society’s evolving expectations.

‘Given the important role that auditing plays in the modern economy, everyone that relies on audit work needs to have the same high level of confidence in its transparency, objectivity and effectiveness.

‘We have said for some time that we support changes that will improve audit quality. The investments and changes we are putting in place will ensure that our people have the skills, knowledge and mindset to perform audits to a consistently high quality day-in, day-out.’

The last major restructure for the firm was in 2018 when PwC started a decentralisation process to move operations outside of London and build up regional hubs.

Earlier this year KPMG was the first of the Big Four to unveil significant changes in response to criticism over audit failures, revamping its executive governance structure, including setting up a new audit executive committee and reshaping its executive leadership team.

Pat Sweet, additional reporting Sara White, Philip Smith

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