BEIS committee begins inquiry into ‘broken’ audit market

The chair of the business, energy and industrial strategy (BEIS) committee has announced the launching of an inquiry into the future of audit, examining what steps need to be taken to restore public trust in the market

The committee, led by Rachel Reeves MP, will examine the current state of the audit market, which is dominated by the Big Four accountancy firms. Speaking at the headquarters of the ICAEW, Reeves said that the current audit market is ‘broken’ and that failings in audits, illustrated by the collapse of Carillion, have undermined public trust in business and the audit market. Reeves argued that government involvement is needed to give voice to public and shareholder concerns regarding the effectiveness of corporate governance, in particular the executives ‘riding roughshod’ over boardroom challenge, and the ‘concocting of accounts that fooled the markets yet satisfied the auditors’.

Speaking ahead of the event, Reeves said: ‘Misleading audits have been at the heart of corporate failures over recent decades. Recent accounting scandals at BHS, Carillion, and at Patisserie Valerie have shown accounts bearing closer resemblance to works of fiction than an accurate reflection of the true financial performance of the business. Repeated accounting failures have contributed to the collapse of major businesses and undermined public and investor confidence.

‘The audit market is broken. The Big Four’s overwhelming market domination has failed to deliver audits which are fit-for-purpose. The lack of meaningful competition has bred conflicts of interest at every turn.

‘The dice are loaded in the Big Four’s favour, as they snap up audit contracts while pocketing huge fees for consultancy work and providing advice on recovering failing businesses. A host of solutions are now proposed to boost competition and improve audit quality. It is important that all options are on the table, including measures to break the stranglehold of the Big Four.

The inquiry comes at a time when the audit market is under increased scrutiny from the government and regulators following the failure of several companies audited by the Big Four. A review of the operations of the regulator for auditors, accountants and actuaries, the Financial Reporting Council (FRC), and led by Sir John Kingman is due to produce a report within the next few months. The Competition and Markets Authority (CMA) is also conducting a review of the market to examine whether it is ‘competitive and resilient enough to maintain high quality standards’.

The inquiry is intended to begin evidence hearings in January, as soon as possible after the results of the Kingman review and the initial CMA report are published.

Experts likely to be called to provide information include witnesses from the Big Four and ‘challenger’ accountancy firms, audit committee chairs, chief financial officers from FTSE 350 companies, representatives from the FRC & the ICAEW, outside experts and Sir John Kingman. The findings of the committee will feed into the CMA study and 'ensure audit reform is linked to coherent reform of the wider corporate governance agenda'.

Responding to the news, the chief executive of the FRC Stephen Haddrill said: ‘We look forward to contributing to this latest review of the audit market. We agree that it is important that the recommendations of the Sir John Kingman review of the FRC and the CMA review of the audit market should be implemented quickly.

‘The FRC has, over many years, held audit firms to account. However, as we have consistently proposed, there are areas where the regulatory framework should be strengthened. We would therefore welcome Parliamentary support in the event the Kingman review agrees that our statutory remit should be enhanced.’

The closing date for written submissions to the committee is 11 January 2019.

Report by James Bunney

 

 

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