Auditors face clampdown after failing to flag up problems at firms before they go bust
Major auditing firms are facing a crackdown after being lambasted for failing to flag up financial problems at companies which later collapsed.
Britain’s accountancy watchdog yesterday promised the regime would make it more difficult for highly paid auditing companies to sign off company accounts.
The changes come in the wake of the demise of Thomas Cook, which was audited by PwC and more latterly EY.
Crackdown: Britain’s accountancy watchdog promised to make it more difficult for highly paid auditing firms to sign off company accounts
The travel operator went bust last week with £1.7billion in debts and a £3.1billion black hole in its balance sheet.
But this was just the latest in a string of high profile company failures in recent years, including BHS, construction firm Carillion and cake shop Patisserie Valerie.
The Financial Reporting Council said the rules were needed because confidence in the audit profession is low.
Coming into force on December 15, the rules will require auditors to describe how they have decided a company is a ‘going concern’.
This is regarded as one of the most fundamental parts of an audit and used to show that a company is able to keep trading for 12 months.
Currently, directors of companies provide an assessment of whether their business is able to keep trading, and auditors do not have to provide any explanation of evidence they have gathered to support their case.
Auditors will now to have to show they have ‘robustly’ challenged ‘management’s assessment of going concern’.
MPs have previously described the audit market as ‘broken’ and called for the big four – PwC, KPMG, EY and Deloitte – to be broken up.
Mark Babington, the director at the FRC who is overseeing the changes, said: ‘It’s in the public interest for us to take action.’