75% of UK audits failed to raise alarm before collapses

U.K. auditors are failing to perform their core function, according to a report published Sunday.

The Audit Reform Lab, a think tank at the University of Sheffield, analyzed 250 of the largest publicly traded companies in the U.K. that collapsed between 2010 and 2022. It found that 75% of audit reports failed to raise an alarm that the collapsed company could go bankrupt by providing a “material uncertainty related to going concern” paragraph or warning in the year prior to the collapse.

Of the Big Four firms, Ernst & Young performed the worst, warning 20% of collapsed companies of going concern risks, followed by PricewaterhouseCoopers (23%), Deloitte (36%) and KPMG (38%). Audit firms beyond the Big Four provided warnings in 17% of cases.

“Auditors are currently incentivized to maintain good client relationships, rather than apply the principles of professional skepticism and enforce prudence. The U.K.’s ineffective regulatory, oversight and sanctions system, and the limited liability for audit partners (under the Limited Liability Partnership business structure used by Big Four firms) provides little disincentive for this model to change,” said the report. “Until the culture of audit is reformed and a new and more effective regulator is in place, partners at audit firms will continue to reap huge financial rewards, despite continued audit failures that harm business confidence and our economy more widely.”

The report comes after numerous high-profile collapses and record fines imposed by Britain’s accounting regulator, the Financial Reporting Council, including KPMG’s audits of construction company Carillion, PwC’s audits of retailer BHS, and EY’s audits of travel firm Thomas Cook. Meanwhile, average partner pay at the Big Four firms in the U.K. rose from 2020 to 2022 by 31%, reaching £872,500 ($1.1 million), according to the report.

KPMG and EY declined to comment. PwC and Deloitte did not immediately respond to requests for comment.