The Big Four auditors have formed
The Big Four auditors have formed £162 million in provisions for penalties.
An investigation by the FRC (British Financial Reporting Council) revealed 30 suspected cases of fraudulent auditing as part of the government's work to create a more effective audit regulator.
The Big Four auditors have made up £162m in reserves to pay fines for fraudulent audits.
The Big Four audit firms have set aside £162m to pay for lawsuits and fines in the UK, in response to increased audit scrutiny and the government's plans to create a stronger regulator.
The FRC (Financial Reporting Council) is investigating around 30 suspected cases of fraud following a series of high-profile corporate collapses including Carillion, Thomas Cook and Pâtisserie Valerie.
These investigations may result in financial penalties for KPMG, PwC, Deloitte and EY, as well as a smaller competitor to Grant Thornton, as the FRC (which replaced the former Audit, Reporting and Governance Authority) seeks to justify itself to the public for taking too lenient a measure against a bad audit that led to bankruptcy.
KPMG's UK partners have formed new valuation commitments (reserves) of £25m for professional and regulatory claims settlement in 2019, raising the partnership's reserves to £68m. KPMG's total valuation commitments were £73m in 2019.
KPMG, the smaller firm of the Big Four, has prepared for possible fines and lawsuits for its work on bankrupt government contractor Carillion, whom it has audited for 19 years. The FRC is currently investigating KPMG's audit of Carillion between 2014 and 2017.
KPMG also faced the threat of a lawsuit from the Insolvency Service (UK) after Carillion's official successor hired lawyers to substantiate allegations of fraudulent auditing.
The FRC is also investigating an audit that KPMG conducted for Rolls-Royce and Conviviality, a drinks' retailer.
KPMG has paid around £20 million in fines over the past two years, more than any of its rivals.
These fines include £5m for working for BNY Mellon, £5m for auditing Co-op Bank in 2009, £6m for auditing Equity Red Star and £2m for working for retailer Ted Baker.
At the same time, Ernst & Young in 2019 increased its claims settlement reserves by £9 million to £17 million. FRC is investigating its audit of Thomas Cook, a travel company, for two years before the company went bankrupt.
PwC also made provisions in 2019 totalling £22m and paid a £4.6m fine for the audit of Redcentric, an IT company, during its last fiscal year. In 2018, PwC paid its highest FRC fine of £6.5m for serious shortcomings in auditing the British retailer of BHS Home Products four years ago.
PwC has not increased its reserves for fines or litigation.
Its BT audit is now under investigation, following a scandal in the Italian division of the telecommunications group.
Deloitte has increased its reserves for claims settlement from £9m to £50m in 2018. The firm said its annual estimated liability for 2019 "did not differ significantly"; however, it has not yet submitted its last fiscal year accounts to Company House (UK House of Registration).
The FRC also commenced disciplinary proceedings against Deloitte for its Autonomy software developer audit between 2009 and 2011. Autonomy was sold to Hewlett-Packard in 2011 for £11.7 billion, but £5 billion was hastily written off its accounts, leading to fraud investigations and litigation in the UK and the USA. Deloitte is challenging the FRC charges.