Big Four under fire for failures in inspecting accountand excessive hospitality spending

The big four accounting firms are under scrutiny after it was revealed they failed to charge some of the UK’s largest companies for the full cost of inspecting their accounts and have been overspending on hospitality with clients, a practice which is banned.

These allegations from the Commons' business, energy and industrial strategy select committee have caused fresh concerns that the auditing industry is not inspecting leading businesses' accounts properly

They also come at a time when the big four are already under fire after the auditing scandals involving Carillion, Tesco and Patisserie Valerie.

UK public companies are required by law to have their annual accounts audited and the auditor should be confident the financial statements are “free from material misstatement, whether due to fraud or error”, said the BEIS committee.

The committee released correspondence with the big four on Monday and showed how the full cost of auditing a company was not always charged to the clients and suspect they could be using the auditing as a “loss leader” to gain more lucrative work from clients.

According to the letters, around 50% of the audits in the last five years at Deloitte and PwC ended up costing 10% more than originally expected. EY said it cost overruns on 32% of audits and KPMG said it did additional work in 16% of cases.

“The BEIS committee’s inquiry looked at audit fees and examined concerns that audits may be not resourced properly and also that competition may be potentially undermined by underbidding [charging lower than cost],” the committee said.

The committee will unveil the full report into the future of audit on Tuesday, with the chair, MP Rachel Reeves, having already said that the “audit market is broken” after launching an inquiry in November.

A KPMG spokeswoman said according to The Guardian: “Our number one priority is to deliver consistently high quality audits. We do not allow profitability considerations to compromise quality.”

Deloitte said ethics went to “the heart of our business” and EY said audit quality was fundamental to the firm’s purpose.

The Big Four are also being scrutinised for spending around £700,000 on wining and dining with their clients despite rules banning such practices.

Between 2016 and 2018, Deloitte spent £217,000 entertaining companies from the FTSE 100 and FTSE 250 that it audits. EY spent £215,000, KPMG £142,000 and PWC £94,000.

The business committee said the four firms also had disclosed maximum entertainment budgets per head. PWC’s was the lowest at £20, while KPMG permits £200, EY £175 and Deloitte permits a spend of £150 per head.