Last day for CMA audit market consultation response

Today marks the final deadline for responses to the consultation by the Competition and Markets Authority (CMA) on changes to legislation to improve the audit sector, which include separating audit from consulting services; greater accountability for audit committee chairs and introducing a ‘joint audit’ regime

Respondents have until 5pm on 21 January to comment on the proposals, which are intended to increase competition in the section and raise audit quality.

The CMA originally conducted a market study in October of last year which identified a number of reasons why it believes audit quality is falling short.

These include evidence of companies picking auditors with whom they have the best ‘cultural fit’ or ‘chemistry’ rather than those who offer the toughest scrutiny and limitations on choice, with the Big Four audit firms conducting 97% of the audits of the biggest companies.

The regulator also reported that 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.

The CMA proposals are for audit and non-audit businesses to be split into separate operating entities. To be effective this will also require separate management, accounts and remuneration.

It also wants close scrutiny of audit appointment and management to make sure those appointing auditors are held to account and independent enough to choose the most challenging audit firm.

In addition, the CMA proposes that audits of the UK’s biggest companies (FTSE 350) 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. A possible alternative is a market share cap – ensuring that some major audit contracts are only available to non-Big Four firms.

CMA chairman Andrew Tyrie said ‘robust reform’ was required and stated: ‘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.’

Statutory audit services market study is here.

Report by Pat Sweet

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