April 24, 2019 Audits: Shaken and stirred
On 18 April 2019 the Competition and Markets Authority (CMA) issued its final report on the future of the audit marketplace in the UK. The report not only takes account of comments received following the issuing of a draft report in December 2018 but also incorporates findings from the Business Select Committee and the Kingman report into regulation and governance.
Aside from identified audit failings following some high profile collapses in recent years, the shake-up of the audit sector seeks to address the perceived vulnerability of the sector in the event of failure of one of the ‘Big Four’ as well as a perceived inadequacy of choice and competition. In addressing these issues the CMA report makes four key recommendations alongside a number of other measures.
The first key recommendation is for an operational split in respect of the ‘Big Four’ in the UK. This would require the audit arm of each company to operate under a separate CEO and board as well as putting an end to profit-sharing arrangements between audit and consultancy divisions. It is hoped that this would result in audits being more focused on outcomes rather than guided by consultancy. Further boosting the requirement for robust oversight, company audit committees would be held to account by their regulator, thereby helping to ensure that auditors are chosen for their ability to provide robust and constructive challenges to accounting practices.
It is fair to say that reaction to the recommendations has been mixed, in particular with regard to the next proposal which looks towards mandatory joint audits. This is aimed at increasing the capacity of challenger firms as a means of boosting choice and driving up audit quality. ICAEW Chief Executive Michael Izza commented that “this looks like a very complex intervention, and there is a high risk that it could both drive out incumbents and discourage new entrants.” ACCA agrees, arguing that the fourth proposal, that of a five year review, might be better targeted if the recommendations were initially introduced on a trial basis.
The majority of private limited companies are not required to have their accounts audited and therefore these proposals would only affect publically quoted entities in general and those larger entities in particular whose accounts may have traditionally been audited by one of the ‘Big Four’. Nevertheless the shake-up of the audit sector could have knock-on effects across the accountancy sphere as challenger firms increased their knowledge and exposure to larger company audits.