Stay up to date with the latest developments in Corporate governance by subscribing to our newsletter.
Get a comprehensive daily email digest, myFT Daily Digest, that covers the latest news on Corporate governance every morning.
The UK accounting regulator is taking steps to strengthen its rules on auditor independence, addressing a potential loophole in the ethical principles of the profession that came to light during the scrutiny of metals magnate Sanjeev Gupta’s business empire.
The Financial Reporting Council has launched a consultation to propose changes to its ethical standard, a crucial guidebook for the accounting profession. The council aims to “enhance and clarify the principles of integrity, objectivity, and independence” that govern the sector.
Currently, accounting firms are not allowed to generate more than 15% of their total fee income from a single client, or 10% if the client is considered a “public interest entity.” These regulations aim to maintain the independence of auditors from the clients whose accounts they analyze. However, the regulations do not explicitly state how to treat companies under common ownership or control when calculating the fee cap if they are not formally part of a single corporate group.
The proposed changes seek to close this potential loophole by specifying that the fee caps apply not only to the aggregate fees received from a company and its subsidiaries but also to “a collection of entities with the same beneficial owner or controlling party.”
This issue gained attention when a Financial Times investigation in 2021 revealed that King & King, a small audit firm, had approved the accounts of around 60 entities in Gupta’s business empire, generating combined revenues of nearly £2.5bn.
The Gupta Family Group consists of numerous separately audited companies, some owned by Gupta and others by his father Parduman, but it does not produce consolidated accounts.
In a testimony before the House of Commons business committee, Milan Patel, partner at King & King, stated that his firm complied with the requirement that a single audit client’s fee income does not exceed 15% of the total. However, he did not directly address whether GFG companies collectively accounted for more than 15% of the audit fees received by King & King.
Darren Jones, Labour MP and business committee chair, welcomed the regulator’s examination of this issue, citing the potential conflicts of interest and compromised independence that can arise when a small or medium-sized auditor relies heavily on a dominant client for fee income.
The regulator attributes the proposed changes to observations made through audit inspection and enforcement cases, but it has not specified any particular investigation that prompted these proposals.
The outcome of the investigation on King & King’s audits of companies in the Gupta Family Group is still pending.
Mark Babington, the FRC’s executive director of regulatory standards, emphasized the importance of upholding high ethical standards in auditing to ensure independence, objectivity, and integrity.
The FRC stated that the overhaul is also intended to align the UK standards with updates to the equivalent international code.
Denial of responsibility! VigourTimes is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
