Audit sector under immediate review by CMA

Audit sector under immediate review by CMA

In the light of continuing audit controversies, CMA will be conducting a market study that will cover three key areas

The Competition and Markets Authority (CMA) has recently announced that they will be launching an immediate review of the audit sector, following on from continuing controversy. They have cited the importance of maintaining “high quality standards” within the sector.

Andrea Coscelli, chief executive at CMA, said: “High quality audit work underpins a successful economy and benefits us all. Given the in-depth thinking already done by the CMA and the Competition Commission before it, we plan to move swiftly and to issue our provisional findings before Christmas.”

Growing concern and public scrutiny of statutory audits – for example, the fall of Carillion – “and the criticism of those charged with reviewing the organisation’s books, as well as recent poor results from reviews of audit quality” have prompted CMA to act, according to their report.

The chairman of CMA, Andrew Tyrie, added: “If the many critics of the audit processes are right, it is not just the companies which buy audits that lose out; it is the millions of people dependent on savings, pension funds and other investments in those companies whose audits may be defective.”

The CMA market study will mainly focus on three areas:

  • Resilience: How does the Big Four’s influence in the world of auditing potentially threaten long-term competition?
  • Incentives: As companies can pick their own auditors – rather than their investors – does this result in a lack of incentive to “produce challenging performance reviews”?
  • Choice and Switching: Changes that have been implemented by the Competition Commission have strengthened the competition between each of the Big Four firms. However, the largest UK companies are still reported to rely on them exclusively when in need of an auditor.

Phil Verity, Mazars UK senior partner, said: “We welcome the CMA’s announcement of its audit sector review and the tight timescales to which it is working. There is a widely accepted need for reform of the listed market and we support changes which help to create a genuinely competitive market which addresses stakeholders’ needs.

“Previous attempts at reform have not brought about the necessary change. We now look forward to discussing with the CMA solutions that can be successfully implemented and are guaranteed to make a real difference.”

CMA’s report stated that they have “written to the government about its market study and the possible need for legislation to implement its findings and those of the independent review of the Financial Reporting Council, led by Sir John Kingman.”

“Sir John Kingman’s independent review of the regulator is a big step in the right direction,” Tyrie has emphasised. He continued: “And the CMA will now examine the market carefully to establish what contribution more effective competition could make to improving audit quality.”

Michael Izza, chief executive at ICAEW, in response to CMA’s announcement, argued that “this is a very positive development” and the “accountancy profession as a whole will welcome it”.

He continued: “It will need to coordinate closely with other processes already under way, such as the review of the operation of the FRC by Sir John Kingman, and the initiatives set out yesterday by the FRC itself. However, it is vital that we rebuild public trust in audit – the success of UK business depends on it.”

CMA’s resultant provisional findings will be revealed before the end of the year, hopefully providing the relevant insight needed into the world of auditing and what needs to change to better the process. More information can be found here.

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