Safety in numbers

Safety in numbers

Joint audits could resolve the issue of audit choice

Last week’s publication of stakeholder responses to the FRC debate on choice
in the UK audit market has left much food for thought. I find it curious that
most responses have shied away from any form of market intervention – audit is,
after all, a regulated activity.

Mazars’ response to the paper does advocate regulatory intervention. Although
we whole-heartedly support the idea of the market working to find solutions, and
that regulators take definite steps to encourage this, we believe that the
strength of existing barriers to entry are such that some form of intervention
is necessary if there is to be any significant redress in the medium term at the
top end of the listed market. Specifically, we advocate joint audit – where two
firms jointly form an opinion on the financial statements of a group – as a
mechanism for change. This has no doubt raised a few eyebrows.

A typical joint audit begins with a joint assessment of risks, after which
work is allocated in a way that maximises effectiveness. The critical issues
identified by the audit teams are then reviewed at group level and there is
joint reporting to group management and the audit committee.

Criticisms of joint audit tend to focus on a potential increase in costs, or
the risk of a confusing process that may increase the likelihood of things being
missed. There is little hard evidence to support this – on the contrary, Mazars’
experience of joint audit has been very positive.

Throughout the process, there is robust, intellectual challenge of each
firm’s views and opinion by the other. Two firms can also stand stronger
together against aggressive accounting treatments.

Furthermore – and critical to the current debate – the system has the
potential to encourage a more competitive audit landscape. Despite the
possibility of two Big Four firms being used on a joint audit, there is clearly
an opportunity for companies to be more willing to engage other firms. The Big
Four then becomes the ‘best seven or eight’, as more firms are given the
opportunity to demonstrate their capabilities, while clients can retain a Big
Four signature where needed.

A number of responses to the FRC paper suggest that the audits of large
groups could be undertaken by more than one firm. Joint audit would provide the
framework to make this effective.

David Herbinet is head of public interest markets at Mazars

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