PracticeAuditThe Debate: Joint audits…

The Debate: Joint audits...

Could joint audits be the way forward in the quest to restore faith in accountancy? 'Yes' says John Mellows, 'break the monopoly of the Big Four'. Ted Awty is sceptical.

Breaking the monopoly

John Mellows

‘Just four firms dominating the international audit market is a problem for competition.’ I have heard one Big Four senior partner make this statement and another agree with it.

I suspect they also think that since little can be done about this problem they are free to express this very damaging view. Four firms have over 85% of the UK listed company market. Choice is limited and conflicts abound. New entrants into this marketplace are vital if real competition – and the confidence it brings – is to be re-established. Is there a solution?

If I say France has one it may hurt Anglo-Saxon pride but it does, and it works. It is called ‘joint audit’ and requires that all companies with an obligation to publish consolidated accounts, and many others, must have at least two auditors who jointly sign the audit opinion on financial statements.

This has enabled firms other than the Big Four to remain credible and thrive in the listed company marketplace. My own firm, Mazars, audits 25% of the CAC40 in France and has significant expertise in listed company audits along with a number of other audit firms outside the Big Four.

Joint audit does more than foster competition. It provides a check and balance on each firm and support on contentious audit issues, increasing the credibility attaching to the financial statements, something the capital markets in the US and UK need more than ever. The costs involved are minimal compared to the overall cost of an audit and minuscule compared to the loss to shareholders and others of corporate failure and loss of confidence.

So why isn’t joint audit higher on the agenda of those looking at audit reform? I fear the answer may be one about which the profession is becoming increasingly worried – it is not in the commercial interest of the ‘all-powerful’ Big Four.

To fail now to grasp the opportunity that joint audit presents may, in future, create a far bigger threat to our profession than that they fear to their own short-term business interests.

  • John Mellows is UK senior partner at Mazars

Beware of the costly red herring
By Ted Awty

As part of the quest for better corporate governance, greater transparency and audit independence, there may be an apparent attraction for joint audits.

The assumption is that by having two firms working together there is less risk, and less chance, of over intimate relationships with the executive. Equally, it believes that introducing a dose of healthy rivalry on the audit enhances performance and rigor.

If perception is the driver, then joint audits may have a role. But for real ways to achieve better governance and greater independence, they can be a red herring. They are potentially costly and complex, which is why they are rare among large global companies.

The potential inefficiencies are multidimensional. Firstly, the client has to interface with two lead partners, and the channels of communication instantly double – aside from the organisation as a whole having to deal with two teams. Equally, the logistics of dealing with audit committee members become more complicated.

More planning is required for the audit, as to how work is allocated, and a considerable amount of additional management time expended, as the two firms involved will inevitably want to be satisfied with the work of the other. On top of this, year on year areas of the audit may be allocated differently, creating a sort of mini-rotation, militating against establishing the essential knowledge of a clientås business that an auditor needs. It’s for these reasons that joint audits typically cost more than single-sourced audits.

Another problem is that firms are, in the outside world, rivals. That’s not to say we cannot embrace co-operation and work with integrity on the job at hand, but it’s not always going to be the most natural of matches. This is particularly the case where firms have different quality control standards and processes, which can lead to divisions over who’s line to follow.

If you are looking for the route to a good audit you need a robust team that understands the business, with an effective working relationship with the executive, and which communicates openly and steadfastly with the Audit Committee. And that’s a team, singular.

  • Ted Awty is head of assurance at KPMG

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