CMA’s joint audit proposals divide opinion
23 Apr 2019
Plans to introduce joint audits for listed companies have been criticised by Big Four firms as potentially further damaging the quality of audits, while challenger firms argue that this would increase access to the audit market
23 Apr 2019
There has been a mixed response to proposed remedies to improve audit market competition and resilience put forward by the Competition and Markets Authority (CMA), with the Big Four firms highlighting potential difficulties in an operational split, while some smaller firms have welcomed the suggestion of mandatory joint audits for larger listed companies.
In a statement, EY said: ‘We fundamentally disagree with the CMA’s proposal for an operational split of the Big Four. We believe this would undermine audit quality by reducing our ability to draw on critical skills, capabilities and investment and diminish the resilience of the audit business. Evidence supports the benefits of a multidisciplinary model to delivering quality audits.
‘At a time when the FRC is reviewing corporate reporting and the Brydon Review may change the scope of audit, it appears ill-timed for the CMA to restrict the skills needed to deliver high quality audit now and in the future.’
EY argued that while ‘the right set of comprehensive changes is needed’, CMA proposals ‘risk the UK’s attractiveness for business’.
The firm challenged the CMA’s proposal for joint audits for FTSE 350 companies, as a way of encouraging the development of smaller firms and so increasing audit market resilience.
EY stated: ‘We were surprised that the CMA has recommended mandatory joint audits, given the level of opposition from companies in their submissions to the market study and the lack of evidence internationally that this measure would improve audit quality or auditor choice. We look forward to understanding the basis of this recommendation and seeing the supporting analysis.’
The proposals were also criticised by the CBI, which warned that some CMA proposals risked damaging the UK’s reputation for good corporate governance.
John Allan, CBI president, said: ‘Improving the quality of audit to enhance public trust and investor confidence must be paramount. But the guiding star for any reforms must be a focus on what works.
‘Mandating joint audits will add cost and complexity for business with no guarantee of better outcomes. Operational splits could restrict access to the skills required to carry out complex audits.’
In its response, the Chartered Institute of Internal Auditors welcomed the proposal to separate external audit from non-audit services, which it said would raise standards, eliminate potential conflicts of interest and ensure the independence of external auditors to reduce the risk of another Carillion style collapse.’
However, Ian Peters, CII chief executive, went on to state: ‘We are unconvinced about the CMA’s proposal for joint audits which risk becoming burdensome for business and there are big unanswered questions about how they would work. Joint audit is a sledgehammer to crack a nut and there are far better ways to raise external audit standards.’
For their part, ‘challenger’ mid-tier firms indicated they saw opportunities with the introduction of the joint audit concept.
Steve Gale, head of audit at Crowe, said: ‘It is clear that audit firms outside of the Big Four have found it difficult not only to be appointed as auditors but even to be considered. Mandatory joint audit provides the chance for challenger firms to demonstrate their capability and quality.
‘Joint audit can help dispel the perception of a cosy relationship between the Big Four auditor and management, as the major issues will need to be considered by both auditors and they will need to come to a joint and agreed opinion.
We are under no illusion though that firms will have to “step up to the plate”. There will be huge scrutiny on the audit quality reviews of the joint audits to see if the quality of the audit improves. That should be the output and must be the key focus of all firms involved.’
Describing the CMA’s recommendations as ‘brave and robust’, Phil Verity, Mazars UK senior partner, said the measures would ‘drive real reform of the audit market, and will deliver a genuine societal benefit as a result’.
‘The cultural shift brought about by the introduction of joint audit in the UK will be profound, and we remain fully confident that it will deliver improved quality, greater confidence in audit reports, and a fairer and more equitable market.
‘It is now the time for us and our peers to take up the challenge: first in ensuring that these recommendations are realised in the near term, and subsequently by working together to embrace a new – and better – way of performing audits in the UK,’ Verity said.
Despite pulling out of FTSE 350 audit tendering last year, Grant Thornton welcomed the proposals.
A spokesperson for Grant Thornton UK LLP said: ‘As per our own submission to the CMA study we support mandatory joint audit and welcome steps to enhance the effectiveness of audit committees as measures to increase competition in the FTSE 350 market.
'We will review the detail of the CMA’s audit market study conclusions and will respond more fully when we have assessed their implications.’
However, BDO’s response to the planned changes was more muted.
Scott Knight, head of audit at BDO, said: ‘Our biggest concern would be no change, and the CMA is certainly tackling that with these radical proposals. Although we still advocate there are other remedies, such as market caps, which would be more effective and quicker to implement, we have continually said we will work with whatever remedies the CMA chooses to pursue.
‘The exemption from joint audits if companies appoint a challenger firm is new and could have a major impact.’
The CMA’s proposals for greater scrutiny of audit committees by the regulator were also viewed favourably, with the CBI suggesting this could help guard against high-profile corporate failures of the sort which have attracted considerable comment in recent months.
An FRC spokesperson said: ‘We welcome the CMA’s proposals to enable the UK audit market to work better in the interests of investors and other users of financial information. We also support the CMA’s objective that reform should drive audit quality and that the regulator should have the means to ensure this happens.
‘In particular we welcome the recognition of the key role of audit committees and the proposed role for regulation in ensuring they deliver on this.’
Report by Pat Sweet