RSM Tenon: Audit reform is inevitable

ANDY RAYNOR is optimistic. As chief executive of seventh-largest UK firm RSM Tenon, he welcomes many of the proposals in the draft green paper on audit, insisting “change is inevitable”.

With the Big Four expressing outrage at Barnier’s headline proposals and the institutes displaying extreme caution, it has fallen to the mid-tier to embrace many of the measures aimed at boosting quality and independence in the audit market.

Raynor bats away critics’ complaints, saying the market “must accept that change is inevitable”.

“Some of the suggested barriers to these proposals are simply not real. People are inventing reasons why change cannot happen; we just need to get on with it.”

Joint audit candidate

RSM Tenon would be a prime candidate for Barnier’s proposed joint audit regime, where the largest public interest entities would be forced to appoint two firms in tandem.

“It’s about what’s best and most palatable for clients and investors,” said Raynor. Joint audits would benefit from a “fresh pair of eyes”, while retaining the relationship with the existing auditor.

Critics fear joint audits will undermine quality, with work falling through the gaps. PwC’s Richard Sexton, head of reputation and policy, said the firm is “deeply concerned many of the proposals will affect quality and clients’ ability to choose their auditor”.

The institutes have warned a lack of evidence that joint audits raise quality means the radical proposal could turn the market on its head with few advantages, while a number of mid-tier firms are critical as they don’t want to be seen “piggybacking” on a larger peer’s success.

Raynor has no such qualms. “The issue here is efficient management. If joint audits are done properly, there is no greater likelihood of problems than in an audit carried out by one firm across multiple offices.”

Cost is another sticking point. Naysayers warn joint audits will significantly push up prices, arguing Barnier’s estimate of a 10% premium is hugely understated.

Raynor does not agree. “We are operating in a competitive market, whether for sole or joint audit. No one will take this as an excuse to inflate costs.”

Regulation protection

However, there are still some issues that could scupper this well-intentioned plan. Were the measure to come into force, the way it is regulated would be crucial. Legislation would have to support mid-tier firms buddying up with the Big Four, or risk major audits rotating between pairs at the very top of the market.

And once a joint audit had been established, the mid-tier firm would have to ensure it is an active participant, not the downtrodden little brother that some critics warn would be the case.

“We may be smaller, but we can’t be junior,” Raynor mused. “We are there to play a very significant role. No one will go in and allow themselves to be dictated to. Legislation has a part to play here, too.”

If joint audit were to work as Raynor hopes, it might provide a springboard for mid-tier firms, helping those growing into the market to invest as needed. It could also raise their profile among major clients unwilling to dabble outside the Big Four, and give firms the experience necessary to take on FTSE-leading clients of their own.

Springboard for success

Audit quality certification is another Barnier proposal some observers believe would boost mid-tier firms, endowing them with the kind of brand built up by the Big Four through years of investment.

This argument holds little appeal for Raynor. “We won’t rely on an outside body for brand; we just want a level playing field,” he insisted.

One expert observer said the scheme would be “just another way to pull control into the centre”, offering no new information and adding nothing to quality-control regimes already in operation, especially in the UK.

Raynor is inclined to agree. “New bodies assessing the quality of audit services? I would need a lot of convincing.”

Existing regulators already do a good job, he insisted, saying: “Lots of work would be needed to prove that this new system would be an improvement.”

Many stakeholders think the Financial Reporting Council and its sub-bodies, including the Audit Inspection Unit and Public Oversight Board, are quite enough for now.

UK’s advanced rules

Commenting on the proposal, investors, lawyers and firms of all sizes have told Accountancy Age that UK regulation is far in advance of some peers in Europe and the US, meaning for London, audit quality certification might be difficult to swallow.

Nevertheless, Raynor’s enthusiasm for the green paper is undimmed. “Barnier’s measures are a reaction to problems in the market, to faults that have been identified and people that have lost money. An ambitious shot has been fired, and now we need a proper and balanced debate undominated by lobbying or vested interests.”

With everything to play for, there is no doubt that stakeholders will do their utmost to influence the debate. The question is, where will they focus their fire? Will critics focus on more radical measures like audit-only firms, potentially allowing joint audit to slip through? And is support for joint audit sufficiently widespread to make an impact, or will Raynor find himself in isolation?

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