Auditors failed to flag three-quarters of business failures in the UK over the past decade, but the pay of top partners has increased sharply as the ‘Big Four’ audit firms have moved to focus on lucrative consulting contracts, according to new research by the University of Sheffield’s Audit Reform Lab.

The research, entitled ‘Reward for Failure’, found that three in four audit reports in the year before a company collapsed failed to provide a ‘material uncertainty related to going concern’ paragraph. Auditors are required to include a such a warning if they believe there is a risk that the company might go bankrupt.

Looking at 250 companies that failed between 2010 and 2022, the research found that EY performed worst among the Big Four, warning of going concern risks for just 20% of firms it audited that later collapsed. PwC provided warnings in 23% of cases, Deloitte 36% and KPMG 38%. Smaller auditors outside the Big Four provided warnings for just 17% of collapsed firms.

Despite that poor record, the research found that average pay for partners at the Big Four firms rose by 31% to £872,500 between 2020 to 2022. In the most recent fiscal year, it said partners at Deloitte earned over £1 million on average and those at PwC close to £1 million.

It also found that from 2015 to 2022, regulatory fines for poor audits were on average only 0.16% of revenue for Big Four firms. “These small fines are not enough to materially affect partner pay – providing an insufficient deterrent, and enabling firms to continue to be rewarded for failure,” the authors of the research report said.

Meanwhile, the research found that 75% to 85% of revenue at Big Four firms now comes from non-audit services, potentially undermining audit quality and creating conflicts of interest.

“Auditors are currently incentivised to maintain good client relationships, rather than apply the principles of professional scepticism and enforce prudence. The UK’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 research report’s authors.

“The UK government set out plans to introduce a new audit regulator, but then failed to introduce them. 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 Audit Reform Lab is a collective of academics, consultants and activists located in the Centre for Research on Accounting and Finance in Context at the University of Sheffield.