Auditors failed to raise alarm for 75% of companies that went bust
New analysis shows that auditors failed to warn about 3 out of 4 of the UK’s largest publicly traded companies that collapsed between 2010 and 2022.
New research published today by the Audit Reform Lab, based at the University of Sheffield, reveals the scale of poor standards and conflicts of interest in the UK audit industry.
The report, Reward for Failure, analysed the audit reports of the largest 250 publicly traded companies that collapsed between 2010 and 2022, and found that auditors failed to raise the alarm of possible bankruptcy in three quarters of cases.
Simultaneously, the Big Four accounting firms – Deloitte, KPMG, PwC and EY, collectively earning 96% of FTSE 350 audit fees in 2022 – have dished out record pay packages to executive staff.
From 2020 to 2022, the average pay for partners at the Big Four firms rose by 31%, reaching £872,500. For partners at Deloitte, average pay reached over £1 million.
“The UK audit sector is plagued by poor standards, a toothless regulator, conflicts of interests and weak sanctions for malpractice,” says Professor Adam Leaver, Director of the Audit Reform Lab.
“Auditors are failing to show independent judgement or professional scepticism – both are non-negotiable features of their job. Reform has been long-promised and is long-overdue”.
This is the first time that researchers have analysed poor performance and high pay in tandem, showing that the Big Four auditors are being financially rewarded for sub-par standards.
Meanwhile, fines for malpractice are too small to materially affect partner pay or change behaviour. Between 2015 and 2022, these fines amounted to on average just 0.16% of revenue and 0.85% of profits for the Big Four firms.
The UK’s audit industry has faced mounting criticism in recent years due to several high-profile companies collapsing – including Carillion, Thomas Cook and British Home Stores.
In 2021, the UK government published a white paper on how to restore trust in the audit sector, but these commitments have been watered down and subsequently dropped from legislative programmes.
The full report, titled ‘Reward for Failure: The paradox of audit partners’ record payouts amidst poor audit quality,’ is available on the Audit Reform Lab website.
