Big Four’s offshore audit model draws scrutiny from UK regulator

The UK accounting watchdog has raised concerns over the ‘Big Four’ companies’ growing use of offshore teams in audit work, warning that overseas staff are increasingly being used for tasks requiring greater judgement, reported the Financial Times (FT).

In its annual quality report published on 22 July, the Financial Reporting Council (FRC) said companies were making wider use of offshore staff in UK audits through “extended team models”.

It said this marked a shift from the long-standing practice of using overseas teams mainly for routine testing and administrative support.

Instead, the regulator said some offshore teams were now taking on work involving “professional judgement”.

The model has been developed over more than a decade by Deloitte, EY, KPMG and PricewaterhouseCoopers (PwC), particularly through large operations in India.

Companies have used these centres to cut costs, access trained staff and provide support across time zones.

Mid-tier operators have also moved in the same direction as the UK market for qualified accountants has become more constrained.

KPMG UK’s latest transparency report showed that around a quarter of staff in its audit practice are based offshore.

Two auditors at Big Four companies told the FT they had seen rising dependence on offshore teams and had concerns about the quality of some of the work delivered.

The FRC said companies needed to “future-proof” themselves against the risks linked to offshoring.

It added that it would monitor how the largest operators manage their “extended team models” over the next year.

The report also highlighted concerns about the ability of UK companies to oversee activities carried out elsewhere in their international networks.

Most major accounting practices operate as networks of national partnerships, with local companies separately owned and managed, and a global body providing overall coordination.

The FRC said PwC’s UK business had identified a “small number” of cases where overseas member companies carried out non-audit work for audit clients without securing the required UK approvals.

The report said PwC was undertaking a detailed internal review to check whether there had been any further breaches.

Under UK rules, companies are prohibited from charging non-audit fees to audit clients that exceed 70% of the audit fee.

These services can include consultancy and tax advice.

The FRC said it would prioritise reviewing PwC’s arrangements for approving non-audit services provided by network companies.

It said this would be pursued through “targeted” supervisory conversations.

PwC said it would elevate the issue to a “higher priority”.

A person familiar with the company’s plans told the FT that PwC was investing heavily to strengthen its “radar” across member practices so risks could be identified more quickly.

That effort forms part of a broader international reorganisation, the person said.

The regulator also said that the gap in audit quality between the largest companies and mid-tier competitors remained wide.

“For firms outside the largest, including more recent entrants… progress is evident but uneven,” the watchdog said.