A rising number of investigations and penalties are further contributing to Big Four dominance in the audit sector, which could undermine reliability, innovation and industry appetite for growth, experts have argued.
The reaction comes after a in Thomson Reuters’ whitepaper, ‘The Future of Audit’, found that the Financial Reporting Council (FRC) had given out six fines for mid-size audit firms, and professionals working at those firms, in both 2022-2023 and 2021-2022.
This was a tripling in the number of fines given out in both 2020-2021 and 2019-2020.
With 98% FTSE350 audit fees already being paid to Big Four firms, the rise in fines has led to fears that it will be more difficult for mid-tier audit firms to get affordable insurance as well as professional indemnity coverage necessary for auditing listed companies.
The impact of regulatory enforcement
Indeed, with the FRC increasing its workforce size, increasingly investigating smaller firms and issuing a record number of fines for poor quality audits, Kyle Gibbons, Europe MD for Confirmation at Thomson Reuters says increased enforcement creates a difficult-to-manage scenario for both mid-size firms and regulators.
“The FRC is in a challenging position of needing to ensure that audit standards stay high whilst balancing that with the need to make pitching for listed company audits worthwhile for mid-tier accountancy firms.”
This task doesn’t look like getting easier: plans for legislation that would have helped mid-size firms access larger auditing projects were shelved in late summer and the FRC said, at the time of this news, that they would need legislative backing in order to boost industry competitiveness.
With fears of fines and reputational damage, as well as the costs associated with complying with increasingly enforced FRC measures, Sam Kunda, co-founder of financial consultancy Change Frontier, believes lack of competitiveness could create spiraling issues in the sector.
He explains that lack of in-roads for smaller firms could lead to the same auditors applying the same auditing methodologies leading to complacency and rising customer costs.
“An auditing ecosystem with more diverse players can better weather challenges and bring multiple viewpoints to the table.”
There are also fears that sector dominance by large auditors could compound skills supply issues, explains Vipul Sheth, managing director of accountancy and audit services provider AdvanceTrack.
“Although [listed] businesses might be better served by [bigger] audit firms, the challenge is that the next tier of audit firms have to deal with a shortage of talent to serve the clients they are now winning, as the Big Four firms have always been able to… raid the next tier of its top talent.”
Strategies to enhance competitiveness in the audit sector
However, there are plans underway to mitigate audit sector issues. The FRC is already working to share more knowledge with smaller audit firms about big auditing projects and how to preserve audit quality.
For Theo Theodoulou, chair of the Global Audit Group, increasing competitiveness will also require aligned impetus from both regulators and mid-size firms, with a focus on exactly this type of communication and knowledge-sharing.
“Mid-size firms should leverage the strength of their networks to build synergies and resource efficiencies while sharing via a network to better manage the risk [and cost] of doing such audits.”
He adds that regulators should manage the expectations of smaller auditors, explain how mid-size firms manage the financial and reputation risks of regulatory reviews, and ensure they are not applying a one-size-fits-all approach to regulating both large and mid-size auditors.
Even then, Theodoulou is wary that the need to invest in methodologies and software to deal with the needs of listed company auditing might be out of reach for smaller firms whilst Sheth believes that listed companies might not want to turn away from the resources and global capabilities offered by the Big Four.
That said, AdvanceTrack’s Sheth still believes that smaller auditors can uprate their chance of securing big audits by focusing their own efforts on retaining and training staff to ensure competitiveness.
“It is for firms at every level to ensure that they create a work atmosphere that encourages staff to stay at an organisation,” he says.
Change Frontier’s Kunda is confident that through collaboration and tailored regulation, the sector can be more competitive and offer opportunities to smaller auditors.
“We need a collaborative approach which could involve revising regulatory frameworks, providing more transparent and proportionate scrutiny, and fostering partnerships between Big Four and mid-tier firms”
This, he adds, will support the drive to a “dynamic, robust and diverse auditing sector that instils trust and confidence in every stakeholder.”