The CMA is recommending the separation of audit from consulting services, and mandatory ‘joint audit’ to enable firms outside the Big Four to develop the capacity needed to review the UK’s biggest companies. It also recommended the introduction of statutory regulatory powers to increase accountability of companies’ audit committees.
The recommendations follow a series of discussions with audit firms, as well as taking into account the recommendations of The Kingman inquiry and a major report from the Business Select Committee.
Although it fell short of calling for a complete and international break-up of the Big Four, the CMA report called for an operational split of the Big Four’s UK audit work. These would include separate management, accounts and remuneration: a separate CEO and board for the audit arm; separate financial statements for the audit practice; an end to profit-sharing between audit and consultancy, and promotions and bonuses based on the quality of the audits.
As one of the ‘challenger firms’, Crowe, which is the UK member of the eighth largest accounting network in the world, has played an active role in the debate around audit quality and choice.
Nigel Bostock, Crowe’s chief executive, said: “Crowe recognises change is needed if the profession is to rebuild public trust in audit and we support the CMA’s efforts and recommendations.
“An environment of transparent financial reporting, high quality audit, and strong and effective regulation is essential for the success of the UK economy.
“We are pleased that the CMA’s recommendations focus on addressing the issues where there has been most concern and have avoided unintended or, indeed, unnecessary consequences for those parts of the audit market that are functioning well.
Dr Ian Peters MBE, Chief Executive of the Chartered Institute of Internal Auditors said: “We welcome the proposal to separate external audit from non-audit services to raise standards, eliminate potential conflicts of interest and ensure the independence of external auditors to reduce the risk of another Carillion style collapse.’
“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.”
Phil Verity, Mazars’ UK senior partner, expressed his approval of the joint audit proposal, a system which is already used in France.
“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,” he said. “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. We are committed to helping to facilitate a vibrant and sustainable market: one with audit quality at its heart, which meets the needs of stakeholders and wider society”.
The future of audit in discussion
Last week, at a conference entitled Audit Reform in the UK, senior figures from the industry debated the proposals on the table and their practical implications.
“The audit business is only now having its post-financial crisis shake up,” said Lucinda Bell, non-executive director and audit committee chair at Rotork.
Criticism of the market is not new – a point made by Sir Donald Brydon in his keynote speech, highlighting concerns first raised in the 1890s.
Sir Donald will report to the Secretary of State with his findings by the end of the year, although it is not yet known when they will be made public.
He told the audience he does not want his report to be used as an excuse to delay reform.
Deloitte’s chief executive David Sproul said the changes should be embraced as an opportunity. He suggested an early warning system which could flag up issues with a company’s financial health before the audit.
“We all recognise how challenging that is,” he added.
Michelle Hinchcliffe, partner and UK head of audit at KPMG, said: “Investors are looking for a bit more colour. We need a framework to compare across companies.
“The more we engage with investors, the more fruitful it is.”
In Brexit year, it remains to be seen how quickly any of the proposals on the table for audit reform are taken up by the government.
Yet investors and auditors alike highlighted the need for the UK to stand out as a beacon of good practice while uncertainty reigns over its exit from the EU.
Professor Karthik Ramanna of Oxford University said: “Investor concerns about corporate governance are very real and international. We can distinguish ourselves here.”