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The proposed new rules come amid frustration in Washington that audit firms are not living up to their duty to protect investors from wrongdoing by their clients. 

Big Four accounting firms are fighting to block new rules in the US that would force them to take more responsibility for rooting out fraud at the companies they audit, the Financial Times has reported. 

To counteract these new rules, Deloitte, PwC, EY and KPMG are trying to sign up their clients to oppose the plan by telling them their fees will increase if the changes go through. 

According to the Financial Times, the firms have days to go before the end of a consultation period on the proposed new rules from the Public Company Accounting Oversight Board (PCAOB). 

The proposed new rules, which would widen auditors’ responsibility to scrutinise whether a company is complying with laws and regulations, comes amid frustration in Washington that audit firms are not living up to their duty to protect investors from wrongdoing by their clients. 

As a result, The Center for Audit Quality – a group that represents audit firms led by the Big Four – has asked corporate directors to sign on to a letter attacking the plan. 

The Financial Times said it understands the letter stated that “auditors are not lawyers and as a result the proposed amendments would expand the auditor’s role to include knowledge and expertise outside their core competencies. The proposal will substantially increase the cost of the audit without a commensurate benefit.”

The proposed rules have proven controversial even within the PCAOB, where they won support from only three of the five board members. The two other members, who have previously worked for the Big Four, both opposed the changes, with one calling them a “breathtaking expansion of the auditors’ responsibilities”.

Lynn Turner, a former chief accountant of the Securities and Exchange Commission who is now an adviser to the PCAOB, said existing standards provided too much “wriggle room” for auditors to avoid confrontation with management when they see potentially illegal behaviour.

Turner said: “The current standard doesn’t serve the capital markets in any way, shape, fashion or form. I’ve told the people at the PCAOB that this is a war and the war has begun. It’ll test those three board members and we will see if they’ve got a spine or not.”

Business lobby groups and the accounting firms are expected to put in comment letters opposing the new rules before a deadline on 7 August.

Writes Corina Duma in Accountancy Today

The FRC has revealed that a record number of cases were resolved in the year 2022/23 that resulted in financial sanctions of £40.5m being imposed, according to the council’s Annual Enforcement Review that was published today (27 July).

Quality improvements in enforcement investigations also resulted in discounts in headline financial sanctions ranging from 25-43%

The year saw the FRC’s highest ever sanction of £20m that was imposed by the Independent Tribunal in a case which “underscores the seriousness of providing deliberately misleading information” to the FRC’s inspections team.

According to the council, its ongoing commitment to “timely” enforcement actions is also reflected in year-on-year improvements in the published KPI over the last five years, with 75% of cases meeting the KPI in 2022/23.

In addition, it also reflected the maturity of changes implemented over the period, including growth in the Enforcement Division’s headcount and methods of honing case focus such as the introduction of in Division specialist senior audit expertise.

Quality improvements in enforcement investigations also resulted in discounts in headline financial sanctions ranging from 25-43%.

Elizabeth Barrett, executive director of enforcement at the FRC, said: “The record number of cases concluded this year reflects the strengthened capability and determination of the FRC to hold firms and individuals to account for serious accounting and audit failures.

“Timeliness has been a key priority over the last five years and significant ongoing improvements in this area are recorded in this year’s review.”

She added: “While higher financial sanctions are an important marker of the seriousness of the failings, non-financial sanctions continue to play a key role in driving improved behaviour and outcomes to deliver long-term positive change.”

Corina Duma writes  in Accountancy Today

These new requirements will boost the resilience of the UK economy, ensuring it continues to attract talent and investment.

The Financial Reporting Council (FRC) has welcomed the Government’s publication of the draft statutory instrument on corporate reporting, which strengthens reporting requirements.

The new requirements will introduce an annual resilience statement, setting out how a company is managing risk, a triennial audit and assurance policy statement, explaining how the company proposes to assure non-financial reporting over the following three years, an annual statement about distributable profits, and an annual statement on steps taken to prevent and detect material fraud.

High-quality corporate reporting contributes to building the environment of trust, transparency, and accountability necessary for fostering long term investment, financial stability, and business integrity. 

These new requirements will boost the resilience of the UK economy, ensuring it continues to attract talent and investment.

The FRC has said to remain committed to building on the UK’s reputation for delivering high-quality corporate reporting by working with government and regulatory partners to develop a focused, modern reporting regime that enhances the UK’s global reputation for high reporting standards, supporting investment and growth while making it easier for companies to comply with their corporate reporting obligations. 

Currently, the FRC is developing guidance, informed by stakeholder outreach and a public consultation, to help companies in complying with the new reporting requirements which it expects to publish before the reporting requirements come into effect.

Mark Babington, FRC executive director of regulatory standards, said: “The publication of this draft statutory instrument demonstrates the government’s continued commitment to audit and corporate governance reform. These enhanced reporting requirements will strengthen transparency and accountability in business by providing key information to investors and other stakeholders.

“The new resilience statement, in particular, will give valuable insight into how companies are building resilience amidst current economic challenges. We at the FRC welcome these steps to boost the quality of corporate reporting and enhance the UK’s reputation for high reporting standards.”

Writes Sofia Floris in Accountancy Today

The world’s major accounting firms are stepping up investments in new Indian facilities away from bigger cities as global demand for cheaper back office operations grows and smaller towns move up the economic value chain.

For decades, large multinational corporations have rushed to India’s biggest metropolises, chiefly Mumbai, Delhi and Bengaluru, to set up massive operational centres that employ millions, lured by vast, low-cost talent pools, particularly in IT.

Business service exports have become a critical part of India’s economy but the sector has been hit by a slowdown in global demand for software and challenges in big urban centres such as rising costs, high attrition and slow progress in getting workers to return to the office after the pandemic.

A report by Ernst & Young in June said it expects multinationals to set up “global capability centres” for all types of industries in tier-2 cities such as Jaipur, Vadodara, Kochi, and Chandi ..

A report by Ernst & Young in June said it expects multinationals to set up “global capability centres” for all types of industries in tier-2 cities such as Jaipur, Vadodara, Kochi, and Chandigarh. The number of such centres could expand to 2,400 by 2030 from 1,600, adding 2.6 million jobs and over $100 billion to the economy.

That means more professional opportunities and potentially higher salaries in areas away from more globally connected business centres

Diksha Mehta, 27, a mathematics graduate from the north Indian city of Patiala is among thousands of new hires, who recently joined Deloitte’s cyber security team – providing consultancy for an Australian bank and retail clients in Europe

“I was preparing for a career in academics but was delighted when I got a job offer along with four classmates,” she said at Deloitte’s Gurugram office, on the outskirts of New Delhi, where hundreds have joined in recent months.

Rising wages, declining accounting graduates in developed countries after the pandemic and amid visa restrictions have helped India emerge as a powerhouse for global business services like taxation, data analytics, cybersecurity and customer management

India is among the world’s top exporters of services, doubling its share in global services trade to over 4% from 2% in 2005, according to WTO estimates

“Global giants are finding it easier and more competitive to shift work to small locations in India,” said Debasish Mishra, chief growth officer, Deloitte South Asia, noting the vast pool of English-speaking accounting, engineering and science graduates

Deloitte, with a workforce of over 100,000 in India, says it will hire 50,000 more staff over three years, and expand its footprint in new towns while KPMG plans to hire over 20,000 over the next three years.

PwC hired close to 12,500 in the fiscal year ended March and expects to hire the same number this year, said Padmaja Alaganandan, the firm’s India chief people officer

All of that could provide relief for the labour market amid slowing hiring in the manufacturing and IT sectors due to global growth concerns.

Prime Minister Narendra Modi has set a service exports target of $400 billion for the current fiscal year, about 25% more than the previous year.

Sunil Talati, president of government-aided Services Export Promotion Council, said total services exports could overtake goods exports in the next five years to $750 billion

RISING WAGES
In Bhubaneswar, the capital of the eastern state of Odisha, Deloitte, PwC, and IBM have opened offices to serve Indian and global clients.

Swagatika Parmanik, 25, left her job as a software professional to join Deloitte as a consultant in Bhubaneswar, a city of about 1 million built around mining and farming.

The new position has given her a more than 50% pay hike and her flexible working arrangements that allow her stay at her parents’ home, 40km f ..

The new offices have also encouraged educational institutions to start new courses and property developers to launch building projects.

A report by Knight Frank consultancy last week said demand for office space has risen sharply in smaller cities, driven by expanding operations of global accounting and multinationals, pushing up rents by up to 10%.

Domestic accounting firms are also moving to smaller towns and raising wages.

The Services Export Promotion Council’s Talati, whose audit firm employed around 400 auditors and consultants in Gujarat, said many firms faced a shortage of certified accounting professionals ..

“Retaining good employees is not an easy task as big companies are doubling the salaries,” said Kshitij Patel of Manubhai & Shah LLP, an Ahmedabad-based accounting firm, working for local and overseas clients.

“With the Big Four and other global firms coming to our cities, we are going even deeper to open offices in smaller cities.”

From the Economic Times July 12^th 2023