PwC shakes up its audit practice
PwC is to spend an extra £30m a year to ensure that it delivers high quality audits on a consistent basis and restores the trust of investors, companies and other stakeholders in its offerings
Its plans include restructuring its UK audit practice, recruiting 500 more experienced auditors, retraining its current audit teams and embracing its critics by commissioning one of the fiercest – Karthik Ramanna, professor of business and public policy at Oxford University’s Blavatnik School of Government – to look at what a culture of challenge means for auditors in 2019.
The new strategy was the result of wide-ranging consultations with stakeholders about the future of audit and what changes would be required to meet society’s evolving expectations, according to PwC head of audit Hemione Hudson.
“Given the important role that auditing plays in the modern economy, everyone that relies on audit work needs to have the same high level of confidence in its transparency, objectivity and effectiveness,” she said. “Today’s announcement is a demonstration of our commitment to audit and to continually improving and strengthening audit quality.
“We have said for some time that we support changes that will improve audit quality. The investments and changes we are putting in place will ensure that our people have the skills, knowledge and mindset to perform audits to a consistently high quality day-in, day-out.”
For years PwC was known as “the blue chip firm” for the high standard of its audits but, along with fellow Big Four firms, Deloitte, EY and KPMG, its reputation has been tarnished recently by a series of accounting scandals that have engulfed the profession.
PwC’s own particular embarrassing episode – its 2014 audit of retailer BHS before Sir Philip Green sold the business on for £1 – will take a while to live down. The revelation that engagement partner Steve Denison had spent just two hours working on the BHS audit before signing off the accounts and backdating his audit opinion finally persuaded business secretary Greg Clark to initiate the series of investigations into aspects of the auditing profession, its regulation and the market.
PwC was fined a record £10m by the Financial Reporting Council, although the amount was reduced by 35% to £6.5m for early settlement. Denison was fined £350,000 and agreed an undertaking not to act as a statutory auditor for 15 years.
Hudson said that the firm would be focusing on three key areas, including extra investment in training, audit quality and a reinforced emphasis on culture and quality control. “Taken together these represent a significant transformation of our audit business that will support our high performing teams in an environment which places a culture of challenge at its heart,” she said.
PwC intends to double the face-to-face training programme for all its experienced auditors, as well as hiring more than 500 extra experienced auditors from across the UK and increasing by two thirds the number of specialists in its audit quality control team.
The audit practice will comprise a newly-created national digital audit team which will concentrate on developing innovative technologies to help drive audit quality, as well as the traditional audit service. It will have “a singular focus on external audit” and PwC’s independent non-executives will strengthen its overall governance.
Hudson said that the firm would also undertake a comprehensive review of the entities it audits “to ensure we achieve a return that allows continual investment in and focus on quality”.
“It is right to continually review how our audit practice operates to ensure we are focused on conducting the most challenging and objective audits,” she added.
“These actions will ensure more consistent audit quality and increased transparency while at the same time strengthening our market resilience.”
ICAEW chief executive Michael Izza welcomed PwC's action plan, particularly because the firm had recognised that restoring public trust in audit could not wait. "While the momentum behind the reviews by Kingman, the Competition and Markets Authority and now Brydon is encouraging," he said, "this is too important to leave to the uncertainties of next year’s parliamentary timetable. It therefore makes sense for the government and the audit profession to get the process of reform under way, and to achieve as much as possible ahead of any new legislation.
“I believe that changes such as this are a good start and demonstrate that the profession is a willing partner. Chartered accountants acknowledge this as a watershed moment and embrace the need for change."
ICAEW is working with all parties to develop measures to improve quality and increase choice in the market, Izza added, while making sure that "audit meets the future needs of the British economy and wider society."
Originally published in Economia on 5 June 2019.