The Financial Reporting Council (FRC) has unveiled plans to stimulate competition and resilience in the UK audit market, with a view to remedying the “high concentration” of power among the Big Four firms.
In a policy paper published on December 1, the regulator calls on the government to push forward with its impending overhaul of the UK’s audit regime, stressing the need for a market that “consistently delivers high quality audit and is resilient”.
“The FRC has set out a high-level policy overview of what we think about competition in the market and the powers we think legislation should give us,” said Mark Babington, executive director of regulatory standards at the FRC.
“It’s intended to encourage discussions with our stakeholders so that they can provide us with their views on creating an audit market that works for everyone.”
The FRC’s policy paper also suggests that competition and choice in the audit market has “recently tailed off”, arguing that UK businesses are increasingly struggling to identify firms willing to bid for their audit work.
It points out that, while FRC measures such as operational separation and the recently published draft standard for audit committees have taken steps towards addressing these market constraints, “legislation is needed to make a significant difference”.
‘Get on’ with audit reform
This view is shared by Gavin Hayes, head of public policy and external relations at the Chartered Institute for Internal Auditors (Chartered IIA), who argued that the government must “get on and publish the draft audit reform bill”.
“Without legislation these will just remain plans. It has now been almost five years since the collapse of Carillion and despite countless reviews, papers and consultations we are still without a bill to make any of this happen.”
Hayes also praised the FRC’s policy paper and its plans to increase competition and resilience in the audit market, calling this “an important aspect of audit reform”.
An overhaul of the UK’s audit and corporate governance framework has been in the pipeline since March 2021, when BEIS published its 200-page consultation paper – Restoring Trust In Audit and Corporate Governance.
The report’s key proposals include the creation of ARGA (a new regulator with stronger powers), an expansion of the definition of public interest entities, a revamped internal controls framework, and the introduction of a ‘managed shared audit’ system to replace joint audits.
Competition policy proposals
In March 2022, the government published its long-awaited response to the consultation. It contained a series of seven measures designed to equip ARGA with the requisite powers to stimulate competition in the audit market.
The measures are:
- An operational objective for competition
- Concurrent competition powers with the Competition and Markets Authority
- Powers to monitor competition and wider developments in the audit market
- Powers to introduce minimum requirements for Audit Committees
- Powers to implement managed shared audit for UK registered FTSE 350 companies
- Powers relating to operational separation of audit and non-audit practices in the largest audit firms
- Powers to monitor the health of audit firms.
According to the FRC, its newly published plan “underpins” these measures.
“It is important to consider how all these measures interact as a package and combine to drive good competition outcomes,” the report said.