Britain’s accounting watchdog has announced plans to tighten industry standards following a spate of corporate failures and auditing errors.
The Financial Reporting Council (FRC) has said UK auditors will need to follow “significantly stronger requirements” than current international standards as part of a revision to the going concern standard.
The UK’s big four auditing firms – PwC, KPMG, Deloitte and EY – have come under significant scrutiny in recent years following a raft of company failures which involved failings by auditors.
KPMG was accused of negligent audit work leading up to the collapse of outsourcing giant Carillion in 2018.
Last year, Patisserie Valerie dived into administration, resulting in dozens of store closures, after a £40 million back hole was uncovered in its company accounts.
The FRC said it hopes other countries will follow suit and strengthen their standards. It has already held discussions with regulators in Australia, Canada and Japan, it said.
The announcement comes a week after the collapse of Thomas Cook, the world’s oldest tour operator, which made thousands of UK staff redundant.
Last week, the watchdog said it was weighing up whether to investigate the travel firm’s failure and impose punishments if necessary.
Auditors must now show greater work to “robustly challenge management’s assessment of going concern, thoroughly test the adequacy of the supporting evidence, evaluate the risk of management bias and make greater use of the viability statement”, the FRC said.
The revised standard also requires improved transparency with “a new reporting requirement for the auditor of public interest entities, listed and large private companies to provide a clear, positive conclusion on whether management’s assessment is appropriate”.
There is also a requirement to “consider all of the evidence obtained, whether corroborative or contradictory, when the auditor draws their conclusions on going concern”.
Stephen Haddrill, FRC chief executive, said: “High-quality audit protects the public interest, meets the needs of users of financial statements and underpins investor confidence.
“Recent corporate failures have, for good reason, adversely affected that confidence.
“Our own enforcement work has demonstrated a need to strengthen existing going concern standards, which is a fundamental aspect of audit, so that investors can have confidence in audited financial statements and businesses’ financial prospects.”