A study has found the public is lacking trust in audit, but as mid-tier firms look to expand their audit businesses to work with more FTSE350 companies, can they help restore trust in an industry badly damaged by scandals?
A study has found that there is an alarming lack of trust in the UK audit market among the general public. Well publicised collapses of large UK organisations, such as Carillion and Thomas Cook, continue to damage the reputation of the Big Four. As a result, calls for significant reforms are getting louder from MPs and the public.
With joint audit – a system that would force Big Four firms to partner with smaller, mid-tier firms when auditing large businesses – being seen increasingly as a viable option, can mid-tier firms lead the way to meaningful change?
The study, undertaken by mid-tier accountancy firm Mazars, found that 17% of the public trusts the current audit system and 72% support the introduction of joint audit, something Mazars has strongly supported in the past.
The latest Queen’s Speech made no mention of reform in the audit market, and yet the spotlight has been firmly fixed on the accountancy industry, particularly for those who occupy the Big Four, following high-profile business collapses.
Both PwC and EY have come under intense scrutiny from MPs during the parliamentary inquiry into the collapse of Thomas Cook, which will likely only added to the general distrust in the UK audit market.
When questioning representatives of PwC during the inquiry, chairwoman and MP Rachel Reeves, said: “I wonder how many more company failures, how many more egregious cases of accounting do we need? We’ve had BHS, we’ve had Carillion, we’ve had Patisserie Valerie and now we’ve had Thomas Cook. How many more do we need before your industry opens its ideas and recognises that you are complicit in all of this and that you need to reform?
“We can’t rely on you to do the right thing and legislation is needed,” she added. “We need tougher regulation because your industry is not willing to make the changes needed. Reform is long overdue, and the evidence today makes it clear that that moment has got to come and got to come soon otherwise we’ll have more business failures and you will be complicit in those.”
Mazars’ study found that the public strongly supports joint audit, something that Reeves has spoken about in the past. In April, during a keynote speech on the BEIS Committee ‘Future of Audit’ report at the ICAEW, she said: “We recognise the limitations of joint audits. But as a mechanism for increasing choice, rather than quality, they may have a role to play in enabling challenger firms to audit the largest companies in the longer term.”
While Reeves wants to see more extreme measures taken, for example the break-up of the Big four – separating their audit business sectors from the other arms of their firms – the Competition and Markets Authority has highlighted joint audit as a key remedy to the current competition problem, and issued this recommendation as part of a package of measures proposed to the government.
For mid-tier firms like Mazars and its competitors, such as RSM and BDO, who occupy the market space below the Big Four firms, joint audit would present an opportunity to work with the largest companies in the UK. Therefore, it is no surprise there is support amongst such firms for meaningful change.
But these firms would also have an opportunity to change the audit culture in the UK. By working closer with Big Four, these smaller firms would be in a position to uphold better standards in the industry, while holding bad practice to account.
Accountancy Age heard from a number of key figures in the mid-tier audit market on both the findings in Mazars’ study and on the issues facing the market as a whole:
David Herbinet, global head of audit and partner at Mazars: “We have long believed that the public has a real interest in an audit system that makes our economy stronger through improved transparency and accountability, and our research only strengthens this belief. High profile company collapses are becoming all too common and impact hard-working people who understandably have grave concerns and are now demanding action.
“There is insufficient choice and resilience in the audit market. Substantial reform is now critical to the sustainable success of our largest companies and the wider economy. Nearly three out of every four members of the public (72%) support the introduction of mandatory joint audit as a remedy, and we see this particular reform as a major opportunity to create an even playing field for challenger firms to compete more fairly in the large corporate market, in which 99% of the audit fees of FTSE 350 companies are currently paid to just four firms. A diverse market is vital for audit quality and for the overall functioning of the economy.
“The CMA has produced a very effective range of measures to create a genuinely competitive audit market that addresses the needs of society. This represents the clearest opportunity in decades for real change. It’s now time to maintain momentum and pursue brave solutions.”
Scott Knight, head of audit at BDO LLP: “We shouldn’t be shocked by these findings and urgently need to rebuild trust. We will only be able to do this when the public can see a real transformation in the market – with increased competition, transparency and accountability.
“BDO has repeatedly voiced concerns that, for all the noise about the need for audit reform, the vested interests aiming to frustrate or dilute reform are growing in strength, which could leave us with no meaningful change at all.
“There’s no silver bullet. A comprehensive package of remedies is required – including more competition focussed on quality, a clear demarcation between audit and non-audit services, and enhanced regulatory oversight. This needs to be implemented with a sense of urgency for the benefit of UK plc.”
Jean Stephens, CEO of RSM International: “We all have a responsibility, within the audit profession, to ensure that improving levels of public trust and confidence remain front and centre. Senior leaders, in particular, must recognise the importance of the part they play in shaping ethically sound, sustainable businesses that not only build trust with society but also with the next generation of employees who are eager to build a career in our profession.
“Certainly, from our perspective, investments into technology, innovation, quality and best-in-class processes are high on the agenda but we also place a significant focus on preserving a working environment that promotes integrity and accountability.
“Ultimately, it’s all about providing assurance not only for our clients but also for our people and the profession, that we have a clear purpose – to adhere to the changing regulatory landscape whilst providing a consistent high-quality service.”
Given these comments from these senior figures representing firms in the mid-tier market, there is real appetite for change. They see a business opportunity in joint audit, there is also opportunity in working to improve the audit industry, particularly in endeavoring to restore public trust in their ability to fulfil the audit role.
Were joint audit to be be implemented as the CMA has recommended, mid-tier firms would be in a position to drive real change.
We considered what the social impact of losing trust in audit is. Read the full story here.