UK watchdog warns on audit firms

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Audit firms are getting a taste of their own medicine.

The UK’s accounting watchdog has announced that it will review governance and culture at audit firms, in response conflict of interest concerns from investors.

The Financial Reporting Council (FRC) said in a report published on Tuesday that “investors have raised concerns with us that in dealing with conflicts of interest, not all firms are demonstrably serving their interests.”

Auditing practice has come into sharp focus in recent years, after high profile enquiries into accounting by companies including Rolls Royce, British Telecom and Tesco.

The Financial Reporting Council (FRC), which supervises audits and has powers to fine and sanction firms which break its rules, said it will begin publishing periodic lists of businesses whose audits it has reviewed.

It added that its ongoing audit quality monitoring had found “insufficient auditor scepticism in identified areas of significant risk” – including whether a company’s assessment of future profitability is realistic, and whether companies’ accounting policies are overly flattering.

The FRC handed out fines totalling over £6.5m in 2016 to audit firms PwC and Deloitte.

However, FRC surveys of FTSE 350 audit committee chair people showed an “overwhelmingly positive” attitudes towards auditors.

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