Grant Thornton against separating audit and non-audit practices of Big Four
In its response to the Competition and Markets Authority (CMA) review, Grant Thornton has called for a ban on firms receiving non-audit fees from Public Interest Entity (PIE) clients however does not believe that splitting Big Four audit and non-audit practices will be an effective remedy
12 Nov 2018
One of the mid-tier firms recommendations to the CMA includes extending the definition of stakeholder in larger companies to also include pension holders, employees, customers, suppliers ad local communities served by the company rather than just the management and shareholders.
Both KPMG and Deloitte have called for a ban on firms selling non-audit services to audits clients. Gran Thornton is also calling for this but notes that ‘there are certain services which a currently defined as non-audit but are compatible with and indeed, complimentary to, the provision of high quality audit’. The firm says that any ban would need to be carefully considered so that these positive services are able to continue.
The firm is against separating the audit and non-audit practices of the Big Four. The firm said ‘audit quality is enhanced by the broader resources and insights that are available to support the audit function on an “as needed” basis in a multi-disciplinary firm. Simply splitting out audit is unlikely to solve all the concerns: rather it would create a group of Big Four audit-only firms, with the same level of market concentration and the same buy-side biases in play.’
Grant Thornton goes on to warn that some mid-tier firms may leave the market rather than split their business but agrees that splitting out audit from non-audit business could partially address conflicts of interest and independence.
Although other firms have been in favour of an audit market cap on Big Four firm, Grant Thornton believes that on its own this rule would not lower the percentage of FTSE 350 audits carried out by the Big Four. ‘It is not clear to us how this would be made to operate without allowing the Big Four to cherry pick the most attractive and profitable audits. Grant Thornton does consider that there may be some benefit in setting an aspirational market share target for an independent auditor appointment body to aim for,’ said the firm.
The mid-tier firm has previously called for an independent auditor body to promote independence and address potential bias in the procurement of audit by large companies.
The firm said: ‘Although a significant change to the current system, this would send a clear signal that the UK is serious about market reform and ensuring that the firm (or firms) appointed to audit a large company is the firm (or firms) that will carry out that role most effectively, balancing the interests of all the various stakeholders and placing the public interest at the heart of the selection process.
‘Such an arrangement could also deal with non-audit service procurement in a fully independent manner addressing current concerns over conflicts of interest in this area (a prohibition on selling non-audit services to PIE audit clients may also address this). We do think that private audit firms will provide the best quality audit in a well-functioning market: Grant Thornton does not support the nationalised provision of audit services.’
In its response, the firm also showed support for joint or shared audits highlighting that they offer the ability to draw on a wider range of technical knowledge and experience.
Jon Roberts, head of assurance at Grant Thornton UK LLP, said: ‘We believe that competition in the audit market for large companies and PIEs is not functioning well and that the measures introduced following the last Competition Commission investigation have not been as impactful as would have been desired. The CMA’s investigation reflects many of the same concerns that led to our unique position of withdrawing from tendering in the FTSE350 audit market, due to its broken nature.
‘We see this CMA study as a chance to better align audit services with core public interest considerations and believe we have a useful perspective to contribute. Even though we may be considered to be potential beneficiaries of reform, we support the objective of reducing concentration in the FTSE 350 audit market because we believe in the principles of effective competition and the consequent benefits on audit quality.
‘We note that the CMA acknowledges that audit scope is also in need of attention but that is not the primary purpose of its study. Considering broader reforms to audit scope, such as increased work on a company’s viability and its anti-fraud arrangements will be important questions for any further reviews on the audit profession in future to answer.’
Report by Amy Austin