CMA reform plan for joint audits and consulting split for Big Four
A five-week consultation has been launched on the Competition and Markets Authority’s (CMA) proposals to address the lack of competition in the audit market with reforms including the introduction of joint audits for listed companies, with at least one firm being non-Big Four, and closer scrutiny of auditor appointments, reports Amy Austin
18 Dec 2018
The CMA has published an update paper outlining ‘serious competition concerns’ with the UK audit market and has put out to public consultation proposed changes to legislation to improve the audit sector.
The proposed legislative changes include separating audit from consulting services; introducing measures to increase the accountability of those chairing audit committees and imposing a ‘joint audit’ regime giving firms outside the Big Four a role in auditing the UK’s biggest companies.
According to Accountancy’s FTSE 100 auditor’s survey, in terms of audit fees the Big Four dominate the market with a total of £668m out of the £669m in total paid by FTSE 100 companies in 2018.
To allow more non-Big Four firms to grab a share of the market the CMA is proposing that the audits of FTSE 350 companies should be carried out by at least two firms, at least one of which would be from outside the Big Four. This will give mid-tier firms access to the largest clients, allowing them to develop their experience and credibility, while also ensuring a cross-check on quality.
Another alternative is a market share cap to ensure that some major audit contracts are only available to non-Big Four firms.
The CMA also suggests that auditors should be solely focused on audit and not also on selling consulting services. One way to address this issue is for audit and non-audit businesses to be split into separate auditing entities with separate management, accounts and remuneration. This way auditors will only be paid for scrutinising a company’s accounts but will still be able to get expertise from other parts of the firm.
There will be closer scrutiny of those appointing auditors to ensure that they are held to account and independent enough to choose the best audit form, as opposed to the one that is the cheapest, for example.
Following the deadline for feedback on 21 January 2019 the CMA ‘hopes to conclude its work as soon as possible in 2019’ but no definitive dates have been announced. As these proposals require legislative changes to take effect, timings for implementation periods for audit firms will be set out by government.
This update paper follows the CMA’s market study which was launched in October 2018, with the CMA identifying a number of reasons why it believes audit quality is falling short. These include:
- companies choose their own auditors, and as a result they pick those with whom they have the best ‘cultural fit’ or ‘chemistry’ rather than those who offer the toughest scrutiny;
- choice is too limited, with the Big Four conducting 97% of the audits of the biggest companies; and
- auditors’ focus on quality appears diluted by the fact that at least 75% of the revenue of the Big Four comes from other services like consulting.
CMA chairman Andrew Tyrie said: ‘Addressing the deep-seated problems in the audit market is now long overdue. Most people will never read an auditor’s opinion on a company’s accounts. But tens of millions of people depend on robust and high-quality audits. If a company’s books aren’t properly examined, people’s jobs, pensions or savings can be at risk.
‘The CMA will now consult on a number of proposals for robust reform. These intractable problems may take some years to sort out. If it turns out that the proposals are not far-reaching enough, the CMA will persist until the problems are addressed.’
CMA chief executive Andrea Coscelli commented: ‘We have moved fast to come up with a comprehensive package of proposals for legislation, which we will now consult on. Successful reform of the audit market will require legislation, in combination with planned improvements to regulation as recommended by Sir John Kingman.’
David Sproul, senior partner and chief executive of Deloitte, said: 'We need a competitive, high quality audit sector that works for shareholders, wider society and businesses, and maintains the UK’s position as a leading capital market. It’s clear that trust and confidence in the role of the profession is not where it should be and we are supportive of change that enhances audit quality and maintains the competitive position of the UK as we prepare to leave the EU.
'This is a critical moment for the profession in the UK and internationally. The CMA provisional findings, the Kingman review and the announcement of Project Flora offer a unique opportunity to develop an audit market and structure that meets the needs of 21st century stakeholders. We will carefully analyse the detail within the CMA proposals and look forward to working with the CMA in conjunction with the findings of the other reviews to develop a world-leading profession in the UK.'
The deadline for comments on the CMA’s update paper is 21 January 2019.
Statutory audit services market study - update paper - published 18 December 2018 is here.
Report by Amy Austin