A US-style regime obliging company bosses to certify the accuracy of their financial reports should be adopted in Britain in the wake of the outcry over the collapse of Carillion, one of the big four audit firms has said.
Sky News has seen a note circulated on Friday to around 700 partners at EY, the professional services firm, summarising its response to a probe by the competition watchdog into the UK audit market.
In it, Steve Varley, EY’s UK chairman, said the introduction of tough new laws akin to those used in the US and Japan were required to hold directors to account.
Known as Sarbanes-Oxley after the US senators behind its introduction in the wake of the Enron scandal, the corporate reporting regime holds chief executives of companies personally liable for errors in their audited accounts.
Mr Varley said a British equivalent, which he dubbed UK-SOX, should now be considered amid growing calls for tougher regulation of the audit market.
“Management and directors (including audit committees) are primarily responsible for the accuracy of corporate information, upon which shareholders and stakeholder rely,” Mr Varley wrote.
“They must play a greater role in that regard and should be held accountable through a framework of enhanced regulatory oversight.
“The Sarbanes-Oxley reforms in the US, where the management of a public company is required to certify the material accuracy of financial statements, could be adapted to the UK market (“UK-SOX”).”
If introduced, such a model would represent a significant strengthening of the oversight to which British company directors are subject.
Its suggestion by one of the “big four” auditors underlines the scale of political and public anger at recent corporate reporting failures, such as Carillion, BHS and, most recently, Patisserie Holdings.
Mr Varley said in his memo to EY colleagues that audit firms should be “answerable for failure, including higher fines and sanctions where audits fail”.
He added that there should be “accountability at senior levels [of audit firms] where audit quality systematically falls short”, and said the profession required “investment in and expansion of our overall regulation, to ensure we have appropriate scrutiny of companies, directors and auditors”.
The existing UK sanctions regime enables the Financial Reporting Council (FRC) to fine firms it regulates up to £10m, a penalty it has only imposed on PricewaterhouseCoopers in relation to its audit of BHS.
That fine was reduced to £6.5m for early settlement.
On Friday, the FRC confirmed a report by Sky News that its chief executive, Stephen Haddrill, would leave next year after a decade in charge.
The watchdog, which has been criticised for demonstrating a toothless response to audit failures, now faces an existential threat from a review of its role and remit by Sir John Kingman, the former Treasury mandarin.
Mr Varley’s note also said that the Competition and Markets Authority inquiry into the audit sector should address the overall corporate reporting framework, “particularly regarding the going concern and viability of companies and the measurement of long-term value creation for stakeholders and other risks”.
He added that his profession “must also have a revitalised purpose, focusing on public interest”.
The summary of EY’s response to the CMA does not refer to a potential cap on the market share of the big four auditors – a measure that the group representing the finance chiefs of Britain’s biggest companies has said risks being counterproductive.
Mr Varley told the Financial Times last week that calls for a break-up of the profession’s leading quartet were “a bad idea” that would endanger the quality of company audits.
EY is the only one of the big four firms – Deloitte, KPMG and PwC being the others – not to have been fined or sanctioned for audit work undertaken in the last five years.
It declined to comment on Mr Varley’s briefing document on Sunday.