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A worker removes items a BHS store. PwC received a record fine for its audits of the failed retailer
Reuters/Peter Nicholls
PwC received a record fine for its audits of failed retailer BHS
COUNT THAT

Some Big Four partners get decade-high UK pay despite falling audit standards

Max de Haldevang
By Max de Haldevang

Geopolitics reporter

The British arms of the Big Four accountancy companies are facing considerable scrutiny amid declines in audit standards and calls by a Parliamentary committee to break the firms up.

Their executives, however, are raking it in.

Deloitte and PwC, the only two to file earnings so far this year, have boosted average partner pay to their highest levels since 2009. PwC’s equity partners will earn an average of £765,000 ($955,000) for the year up to June 2019, while Deloitte’s will earn £882,000 ($1.1 million). The two firms’ profits soared this year, with part of PwC’s income coming from its advisory services on how to handle Brexit.

Both companies have been subject to relentless criticism over the quality of their audits of public companies. The Financial Reporting Council (FRC), an accountancy watchdog, fined Deloitte £4.2 million ($5.2 million) in July for its audit of government outsourcer Serco’s fraudulent accounts, and is investigating the firm’s audits of outsourcer Mitie Group and construction materials supplier SIG. Meanwhile, PwC received a record £6.5 million ($8.1 million) fine last year for signing off on collapsed retailer BHS’s “misleading” accounts, and is reportedly under investigation in both the US and the UK over an accounting scandal at telecoms group BT.

The average quality of the two firms’ audits of large public companies is lower than it was five years ago, according to FRC data, and far below the standard agreed between the watchdog and accounting companies, which calls for 90% of audits of major public companies to require no more than limited improvements.

Those scandals were among several that pushed the British Parliament’s Business, Energy and Industrial Strategy Committee to recommend breaking up the Big Four, splitting their audit and consulting divisions into different companies over fears of conflicts of interest. The Competition and Markets Authority (CMA), a competition watchdog, has proposed requiring two audits on every FTSE 350 company—with one coming from outside the Big Four—and a watered-down operational break-up of audit and consulting divisions. PwC gave the CMA’s recommendations a cautious welcome, but all the Big Four have protested Parliament’s suggestions.

PwC has “responded constructively” to the reviews into the audit industry, a spokesman said in a written statement. That response includes launching a consultation and an investment program into its audit quality, he said. He acknowledged the firm was “disappointed” in missing the FRC’s 90% standard. “We welcome more choice in the market and reforms that will improve audit quality and are committed to playing our part in building trust and confidence in the sector,” the spokesman wrote.

A Deloitte spokesman pointed Quartz to its annual report, which highlighted that it was making investments in audit quality and said it was “engaging” with the reviews into the market. It noted that the overall quality of its audits—including for firms outside the FTSE 350—had improved upon last year’s, according to FRC figures. The report notes that profit distributed to partners would not have increased in 2019 were it not for factors including a one-off gain from selling an investment and favorable currency rates.

Handing out such raises while the quality of audits decline and clients face accounting scandals is a sign that firms have lost the “culture and ethos of protecting the public interest,” said Atul Shah, a prominent Big Four critic and accounting professor at City, University of London. “Public service and values are going out of the window given the poor record on audit quality and effectiveness,” he wrote in an email.

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