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Executive Summary

The UK’s audit industry has faced unprecedented criticism after high-profile corporate collapses – including Carillion, Thomas Cook and BHS – highlighted significant deficiencies in audit practice. This criticism takes place within the context of record partner pay at the large accounting firms responsible for the audits of most of the UK’s largest companies. To date these two features – poor performance and high pay – have been analysed separately, rather than as an integrated phenomenon. This report explores the extent of ‘reward for failure’ in the Big Four empirically, and examines the structural conditions that explain why these two features arise simultaneously.

We analysed the audit reports of the largest 250 publicly traded companies that collapsed between 2010 and 2022 and found:

  • Auditors are failing to perform their core function. Three in four audit reports failed to raise the alarm that the collapsed company could go bankrupt, by providing a ‘material uncertainty related to going concern’ paragraph or warning in the year prior to the collapse. Auditors are required to include this going concern warning if they believe there is a risk that the company may go bankrupt – rather than making a prediction that it will.
  • Of the Big Four auditors, EY performed worst – warning of going concern risks for just 20% of collapsed firms. PWC provided warnings in 23% of cases, Deloitte 36% and KPMG 38%. Auditors outside the Big Four performed even worse – providing warnings for just 17% of collapsed firms.
  • There are serious concerns that auditors are not challenging enough. Of the 250 liquidated companies, 38 declared dividends in their last set of accounts. Ten of these did so despite making a loss, and two – Entu (UK) PLC and Utilitywise PLC – did so despite reporting a loss and having a negative net asset balance, which is a strong indicator of insolvency risk.

We also analysed partner pay at Big Four firms and the fines issued by the Financial Reporting Council (FRC), the audit regulator, and found:

  • From 2020 to 2022, the average pay for partners at the Big Four firms rose by 31%, reaching £872,500.
  • In the most recent fiscal year, partners at Deloitte earned over £1 million on average in pay and those at PwC close to £1 million. KPMG and EY also reported their highest ever partner earnings.
  • From 2015 and 2022, regulatory fines for poor audits were on average just 0.16% of revenue and 0.85% of profits for Big Four firms. These small fines are not enough to materially affect partner pay – providing an insufficient deterrent, and enabling firms to continue to be rewarded for failure.
  • Between 75% (KPMG) and 85% (Deloitte) of revenue at Big Four firms comes from non-audit services. Focusing resources on consultancy rather than audit services in this way could undermine audit quality and create potential conflicts of interest.

Audit is an essential service that ensures the integrity of company reporting, and if done properly, would help to boost confidence for shareholders and other users of company accounts.

However, auditors are currently incentivised to maintain good client relationships, rather than apply the principles of professional scepticism and enforce prudence. The UK’s ineffective regulatory, oversight and sanctions system, and the limited liability for audit partners (under the Limited Liability Partnership business structure used by Big Four firms) provides little disincentive for this model to change.

The UK government set out plans to introduce a new audit regulator, but then failed to introduce them. Until the culture of audit is reformed and a new and more effective regulator is in place, partners at audit firms will continue to reap huge financial rewards, despite continued audit failures that harm business confidence and our economy more widely.

Reward for Failure →

R4F Briefing →

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