Editor’s comment: reforming the audit profession
As the clamour for audit reform and a second competition review into market concentration of auditors intensifies, Sara White, editor at Accountancy, considers some of the reform options from an auditor appointment quango to a shared open source technology platform
1 Oct 2018
What is the future of audit? Perhaps more fundamentally is current audit methodology developing and evolving to meet the needs of major multinationals, or is it stuck in a historic framework, established over 30 years ago when businesses were so different and technology was so basic?
In many ways, the decade since the 2008 crash has seen an overhaul of audit regulations, attempts to improve oversight and toughen tendering rules. Arguably none of the reforms have had any real effect with big business merely swapping between the Big Four firms when their tender cycle comes up.
Political pressure is growing with MPs calling for a radical overhaul of the current status quo where the Big Four firms dominate the listed audit market to the virtual exclusion of all other players. When Grant Thornton pulled out of the listed audit market it was merely an irritant to the audit committee chairs who faced even less choice.
So what is the solution? It is five years since the first CMA report into audit concentration when it said that ‘more regular switching would not only open up the market to greater competition but also reduce the long tenures that can reduce the appearance of objectivity’.
Clearly this did not work. What of the end-users, the actual buyers of audit? Without legislation requiring the largest listed companies to choose a smaller audit firm, which sounds non-competitive, why should they ditch the Big Four? Whatever proposals came out of that piece of work were not effective as there is still widespread dissatisfaction with the auditors.
Likewise multimillion pound fines and sanctions for firms and partners involved in audit failures have not had an impact, merely seen as business running costs.
After a series of meetings at the CMA, it seems that an initial stage 1 market study will be launched, considering market domination and competition barriers, and looking at options for audit reform. This could form the groundwork for a full market investigation.
Reform suggestions include a quango tasked with appointing listed auditors, creating a form of nationalised competition, with FTSE 100 audits split between Big Four and mid-tier firms. Some have suggested this would be a short-term solution, perhaps only for two or three years, simply to disrupt the market. But audit tenures do not change frequently so this is questionable. Another option is breaking up the Big Four but this would only result in a mirror set of auditors, or perhaps setting up a mid-tier syndicate, which could work together to pitch for audits.
Yet another idea is to create a shared, open source technology platform, opening up technology developed by the Big Four, to all firms involved in audit. Although this sounds like a wholly philanthropic approach, it could work for the public interest, creating a robust shared audit methodology and future proofing the profession against increasing automation. After all, technology is the factor most likely to transform audit in the next few years.
About the author
Sara White is editor of Accountancy