A study by the University of Sheffield’s Audit Reform Lab revealed that 75% of audit reports did not flag a “material uncertainty related to going concern” before companies went bankrupt.

The analysis, which scrutinised audit reports of the 250 largest publicly listed companies that failed between 2010 and 2022, showed EY issued going-concern warnings for only 20% of companies it audited before their collapse, the lowest among the Big Four.

PWC provided warnings in 23% of cases, Deloitte 36% and KPMG 38%. Auditors outside the Big Four performed even worse – providing warnings for just 17% of collapsed firms.

The report also analysed partner pay at Big Four firms and the fines issued by the Financial Reporting Council (FRC). From 2020 to 2022, Big Four partners saw their average pay surge by nearly a third to £872,500 from 2020 to 2022.

In the most recent fiscal year, partners at Deloitte earned over £1 million on average in pay and those at PwC close to £1m. KPMG and EY also reported their highest ever partner earnings.

“There are serious concerns that auditors are not challenging enough,” the report stated, highlighting that 38 out of 250 liquidated companies declared dividends in their final accounts, including ten that were loss-making and two with negative net assets, indicating insolvency risks.

The report explained that “auditors are currently incentivised to maintain good client relationships, rather than apply the principles of professional scepticism and enforce prudence”.

With the currently “ineffective” regulatory, oversight and sanctions system in the UK, 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”.

This report follows the UK accounting watchdog’s recent multimillion-pound fines on PwC and EY for audit failures at London Capital & Finance. High-profile corporate failures like BHS, Carillion, and Thomas Cook have driven the government to propose stricter audit regulations, though these efforts have faced delays. The creation of a stronger regulator, the Audit, Reporting and Governance Authority (Arga), has also been postponed.

Richard Moriarty, CEO of the FRC, said in March that he was a “sheriff for only half the county,” hamstrung by funding issues due to the absence of long-awaited legislation.

Despite increased fines against audit firms, the Audit Reform Lab noted these penalties were too insignificant to impact partner pay and deter audit failures.

The report concluded: “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.”