FRC steps closer to bridging the divide

The history of the debate on competition and choice in the UK audit market
could be best described as fractious, but last week the Financial Reporting
Council seemed to buck the trend with the release of a report that seemed to
have the support of all factions in the discussion.

The interim report of the market participants group, an amalgamation of
practice professionals, investors and FDs, put forward 15 recommendations for
steps that could be taken to improve choice in the market.

Despite the diversity of the MPG’s membership, the recommendations were fully
supported by all members. There were no resignations and no minority reports
opposing any of the suggestions – a remarkable outcome given the divisive nature
that has characterised the audit choice project so far.

‘There are a diverse range of interests within the MPG, but the atmosphere
was very constructive and the discussions sensible,’ said FRC chief executive
Paul Boyle.

Another source close to the MPG said: ‘The group was extremely cohesive.
There was a consensus on the recommendations and no situation had to go to a
vote.’

Agreement within the MPG is no guarantee of wider backing for its
suggestions, though, and the real test of support for the 15 recommendations
will be how the consultation on the measures, which closes in July, proceeds.
Early indications are that the 15 suggestions will be encouraged by the
financial community.

One City investor said the package showed ‘common sense’, while Tony
Bromwell, head of accountancy ethics and markets at the ICAEW, said measures
were ‘proportionate’ and took the debate in the ‘right direction’. Mazars, KPMG
and Grant Thornton all offered similar encouragement.

But while the measures have been widely welcomed, there are still problems
clouding the process that the FRC and MPG will have to address.

BDO Stoy Hayward managing partner Jeremy Newman expressed his concerns over
the impact the FRC’s work was having in practice, describing the MPG report ‘as
a step in the right direction – but only a very modest one – seeking to create a
climate of change but falling short of actually making any real change’.

‘It is now a year since the Oxera Report was published but so far we have
seen little (if any) real change in the marketplace,’ Newman said, arguing that
if real change was to take place proportionate liability needed to be secured
and audit inspection reports made public.

The FRC and MPG still have their work cut out to persuade dissenters.

What some of the recommendations mean

Recommendations 1 and 2

1. ‘The FRC should promote wider understanding of the possible effects on audit
choice of changes to audit firm ownership rules’.
2. ‘Audit firms should disclose the financial results of their work on statutory
audits and directly related services on a comparable basis.’
• What it means:
These two suggestions go hand in hand. The idea is that if ownership of audit
firms can be opened up, and investors can see that auditing is profitable,
capital will flow into the market and create more choice.

Recommendation 14

‘Every firm that audits public interest entities should comply with the
provisions ofthe Combined Code on Corporate Governance with appropriate
adaptations.’
• What it means:
Independent directors for accounting firms? A senior partner who can’t be
chairman? No-one is sure how this will work, but some kind of governance changes
are on the cards.

Recommendation 15

‘Major public interest entities should consider the need to include the risk
of the withdrawal of their auditor from the market in their risk evaluation and
planning.’
• What it means:
If you are an FD and your auditor does an Arthur Andersen, you better know who
to turn to, to pick up the pieces. This may force companies to look beyond the
Big Four for back up.

See all 15 recommendations at
www.frc.org.uk/press/pub1302.html