Making the case for shared audit

Making the case for shared audit

Clive Stevens, Chairman of the Association of Practising Accountants makes the case for shared audit as the solution for the future of audit.

Making the case for shared audit

Audit is integral to the effective operation of capital markets as well the sustainable growth of many of the owner-managed businesses that help drive prosperity across the UK. If Government and regulators want to help encourage a more competitive audit market with multiple players helping drive quality and choice, an important consideration should be how to encourage firms to skill-up to take on larger audits.

This challenge is not a new one. A key conclusion of the 2013 Competition Commission enquiry was that “mid tier audit firms face barriers to entry, expansion and selection in the FTSE 350 statutory audit market”. As the Association of Practicing Accountants (APA) pointed out in its submission to the CMA there is little to suggest much has changed in the intervening six years despite the new audit-tendering regime.

Over recent months joint and shared audit have both been floated as possible solutions here. A joint audit requires both auditors to sign off the accounts of the audit client where as a shared audit has one firm designated as the statutory auditor of the parent group with the other firm supporting this process through, for example, the auditing of group subsidiaries.

While joint audit was the preferred option of the CMA coming out of their Market Study, the recent publication of the Government consultation on statutory audit services also puts shared audit on the table. The APA has consistently argued for shared audit in its representations to the CMA, the BEIS Select Committee and the Brydon Review and it was good to see policy makers recognise this as a potential solution.

By way of background, APA member firms collectively audit and advise a significant proportion of the real economy – some 14,000 entities with turnover ranging up to the hundreds of millions. These businesses employ a significant number of people and are key to the success of the UK economy.

A number of our members would like the opportunity to be recognised as challenger firms and to take on more listed company audits but currently lack the scale and sector experience to be able to do so. Recent member research suggests that regulatory and market barriers – and in particular compliance costs, coupled with increased liability exposure and reputational risk – were seen as the biggest disincentives to entering this market. While scale and expertise were also identified as challenges, there was nothing to suggest longer term these could not be addressed.

From a competition perspective we can see the attraction of joint audit, which would enable the sector to get over the immediate market concentration issue by allowing two or three challenger firms to take on FTSE 350 audits. Introducing shared audit however, would enable medium size firms to enter the market providing the pipeline that the sector needs to mitigate the risk of future market concentration.

Of course this need not be an either or approach. Giving listed entities the decision here would enable a market led solution that we believe would help deliver much needed choice to the sector. It should also be pointed out that this is not a short-term fix – it will take time for smaller firms to make the investment needed to meet these demands.

Moreover shared audit is only part of the solution. We would also like to see the proposed new regulator adopt a truly proportionate approach to the sector, which encourages smaller firms to tender and, critically, plays an educative role in terms of encouraging and assisting challenger firms to reach the quality required by setting out what good looks like across the sector.

Taken together these changes could go a long way to ensuring a more open, competitive audit market with attendant benefits for corporates and investors as well as the beneficial owners of these companies.

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