Audit firms should be banned from carrying out consultancy services, according to a report of MPs.
The Business, Energy and Industrial Strategy Committee this week released a report into the future of audit, launched after recent accounting scandals at firms including Carillion and Patisserie Valerie.
Among a raft of conclusions, it said that audit firms currently face conflict of interests if they also carry out advisory services, leading to lower quality auditing.
Committee chair Rachel Reeves said: “For the big firms, audits seem too often to be the route to milking the cash-cow of consultancy business.
“The client relationship, and the conflicts of interest which abound, undermine the professional scepticism needed to deliver reliable, high-quality audits.
“Splitting audit from non-audit business would be a big step to boosting the culture of challenge needed to deliver high-quality audits.”
The report said that non-audit profits currently subsidise the pay of audit partners within firms.
“We do not think that this is a healthy state of affairs,” it said.
“Audit partners must not be or feel indebted to non-audit partners.
“That frame of mind can only lead to audit partners being mindful of the interests of the non-audit practice, when we expect them to serve the interests of the firm, its shareholders and the wider public.”
Commenting on the report, Graham Liddell, managing director of public sector governance consultancy LPFG, said: “In some ways the public sector is ahead of the game.
“We have had independently appointed auditors for years and there are strict rules on consultancy work that audit firms can carry out.
“But we have plenty of warning signs of our own.
“The creation of Public Sector Audit Appointments failed to bring new entrants to the public sector audit market, strong audit committees are few and far between and with further audit fee cuts in 2018/19, public sector audit quality is also under threat.”
Michael Izza, chief executive of accountancy membership body ICAEW, said that the proposals to break up multidisciplinary firms carrying out audits could prove counter-productive.
He said: “There is a real risk that this could both drive out incumbents and discourage new entrants, meaning that an attempt to guarantee the independence of audit firms actually ends up undermining the resilience of the market.”
Peter Swabey, policy and research director at ICSA: The Governance Institute called the proposal a knee-jerk solution” which “risks allowing legitimate concerns about the concentration of the audit market to become conflated with the central issue of audit quality.”
In January, the to ensure that balance sheets are not being manipulated in order to justify commercial ventures.
