U.K. Regulator Asks Accounting Firms to Wall-Off Audit Practice, Install Separate Board

The new rules are aimed at improving audit quality in Britain

The London skyline, showing skyscrapers in the City financial district. A U.K. regulator is asking audit firms to make changes to their businesses to reduce conflicts of interest.

Photo: Dominic Lipinski/Zuma Press

A U.K. regulator for audit and accounting is asking professional services firms to ringfence their audit practices and put in place independent boards amid increased concerns around audit quality in Britain.

The Financial Reporting Council this week sent a letter to the seven biggest U.K. audit firms, consisting of the Big Four—Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers—as well as BDO, Grant Thornton and Mazars, asking them to make changes to how they run their audit business to reduce conflicts of interest.

“We expect the firms to put in place independent governance for the audit practice and ensure that the audit practice is appropriately ring fenced from the rest of the firm so that financial results are clear and transparent,” Claire Lindridge, the FRC’s director of audit firm monitoring and supervision, said Thursday in a press release.

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That means audit units at these seven companies have to be financially independent from other business units, thereby ending profit-sharing between audit and other entities, and that they have to have separate boards, a spokesman for the FRC said Friday.

The FRC wants companies to take steps to separate their audit businesses ahead of potential legislation that might be introduced by the U.K. government, the spokesman said. The legislation could mandate these separations.

Regulators, lawmakers and government-backed reviews have made various proposals for an overhaul of the U.K. audit sector, including a call from a parliamentary committee for a breakup of the Big Four, but the government has yet to respond.

The Competition and Markets Authority, the country’s competition regulator, last year suggested an operational split between firms’ audit and consulting businesses.

The FRC is seeking comment from the audit firms, the spokesman said. He declined to comment on when the outlined changes would be effective.

Ernst & Young said it was reviewing the FRC’s proposals, while PwC stated it would engage in discussions with the regulator. Deloitte declined to comment. KPMG, BDO, Grant Thornton and Mazars didn’t immediately respond to a request for comment.

The changes are expected to boost demand for smaller professional services firms, as bigger companies cease to provide consulting to listed audit clients, said Fiona Czerniawska, managing director at Source Global Research, an analyst firm.

Write to Nina Trentmann at Nina.Trentmann@wsj.com

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