Monday 19 April 2021 12:37 pm

Blacklist audit firms for fraud failures, urges Pirc

Large audit firms that are deemed not to be working hard enough to root out corporate fraud will be blacklisted in this year’s annual shareholder meetings by Pirc.

Pirc has urged investors have not to reappoint PwC, KPMG, EY or Grant Thornton because it believes they have not done enough to improve their fraud detection process, The Times first reported.

Pirc is trying to force accounting firms to address an “expectations gap” between existing professional standards for auditors over corporate fraud and what the public and courts expect.

In contrast, Pirc said Deloitte, BDO and Mazars have committed to bettering their fraud detection processes.

Pirc head of governance and financial analysis Tim Bush told The Times: “The expectations of auditors are very much higher than is pretended. Until these firms recognise that fact, then why should anyone trust them to be able to vote for them?”

Last month the Department for Business, Energy and Industrial Strategy released a consultation that would see the creation of a new watchdog, the Audit, Reporting and Governance Authority, which will take over from the current Financial Reporting Council and be awarded stronger powers to enforce industry standards.

A PwC spokesperson said: “We support measures that promote high quality audits and, as part of our three year Programme to Enhance Audit Quality, we introduced additional training for our auditors from our forensic investigations practice about frauds they have investigated and what our auditors can learn from their experiences.”

KPMG, EY and Grant Thornton were also contacted for comment.

Anita Clifford, barrister at Bright Line Law, said: “The blacklisting of certain UK auditors is an influential development, particularly since Pirc is one of Europe’s largest shareholder consultancies.

“The decision occurs in the wake of high profile corporate collapses in the UK in recent years, such as Patisserie Valerie and Carillion, which have had underlying fraud allegations. There have also been a handful of Deferred Prosecution Agreements of household name companies for fraud. 

“These scandals have turbo-charged an ongoing debate about the role of an auditor, what professional scepticism means in practice and whether the major players are doing enough to combat fraud. When a well-known company fails or is reprimanded, the finger is inevitably pointed at the independent auditor rightly or wrongly.”

Clifford said the move was likely to prompt the firms to re-examine their anti-fraud procedures, adding: “If the blacklisting recommendation is followed, firms stand to lose a significant stream of work.”