Keeping to letter - and spirit - of the law on independence

IN the wake of a recent British parliamentary report lambasting the country's audit market as a "cosy club incapable of providing the degree of independent challenge needed", the top-tier audit firms have continued to be in the news for all the wrong reasons.

The Financial Reporting Council (FRC), Britain's accounting watchdog, announced this week that it had begun an investigation into KPMG's audit of drinks company Conviviality, which went into administration in April. This comes just weeks after the regulator fined the firm £4.5 million (S$8.1 million) for its work on the accounts of scandal-hit British insurance firm Quindell. The FRC also recently handed a £10 million fine to PricewaterhouseCoopers for its 2014 audit of department store chain BHS, and launched a probe into Deloitte's audit of SIG plc, a UK supplier of building materials. Meanwhile, a US federal judge on Monday ordered PwC to pay US$625.3 million in damages to the Federal Deposit Insurance Corp (FDIC) for failing to uncover fraud that led to one of the biggest bank failures of the global financial crisis, the collapse of Colonial BancGroup.

Itself under pressure from UK lawmakers (following the demise of outsourcing contractor Carillion in January) for having been too slow and too soft on the Big Four firms caught up in company scandals, the FRC has stepped up its oversight of the profession - with strong criticism and stiff fines for the big names where they have fallen short. The regulator singled out KPMG for "unacceptable deterioration" in the quality of its audit work but made clear that all the Big Four firms - which include Ernst and Young, also the target of a misconduct probe late last year - must act swiftly to reverse the decline in the latest audit inspection results. More scathing has been UK lawmakers' verdict of the auditing fiasco, saying that the Big Four coterie "was symptomatic of a market which works for the members of the oligopoly but fails the wider economy", and urging the FRC to consider breaking up the four.