Carillion collapse: CMA, audit, and construction

Carillion collapse: CMA, audit, and construction

Although the CMA report has highlighted changes that need to be made in the audit sector (as pointed out by Duff & Phelps), MHA MacIntyre Hudson has emphasised the need to look at other sectors, using Carillion as an example.

The Competition and Markets Authority’s (CMA) report looking into the efficiency of the audit market has been a source of great debate in the accountancy world. Sparked by the likes of the fall of Carillion last year, the CMA determined that something had to be done to improve the process so that less mistakes would be made in the future.

Global financial advisers, Duff & Phelps, have revealed that they welcome the “robust reforms” required to help address the various issues identified by the CMA that currently exist in the sector.

The advisers have said that this “welcome reform” will do much to restore confidence in the auditing process, as well as hopefully encouraging some competition outside of the Big Four.

“The CMA report is clear,” said Paul Clark, managing director at Duff & Phelps. “It is proposing changes to legislation to introduce a range of new measures to separate the audit function from other consultancy services. In addition, it is introducing measures to increase the accountability of audit committees, as well as imposing a new joint audit regime, giving firms outside the Big Four a new role in auditing many of the UK’s leading companies.”

The report concluded that auditor focus is consistently diluted due to the fact that around 75% of the Big Four’s revenue currently comes from other services, such as consulting.

The key recommended changes laid out by the CMA are as follows:

  • Regular scrutiny of auditor appointments and management.
  • A Joint audit system being introduced to encourage collaboration between Big Four and non-Big Four firms.
  • A split between audit and advisory business.

Clark concluded: “The CMA itself has called for ‘robust reform’ and recognises that this may take some time. But it has also said that, if these reforms don’t go far enough, then it will ‘persist until the problems are addressed.’ Competition in this market is weak, as many of the UK’s largest companies have limited choice, given that one or more of the Big Four may be conflicted.

“We are pleased to see that the CMA is proposing that the audit process of the FTSE 350 companies should be carried out by at least two firms, with one firm being outside the Big Four. This will give many mid-tier firms access to the market, allowing them to bring independent advice, while instilling client confidence as a result of a process that is designed to cross-check quality.”

Other firms will be able to send in their own responses to the CMA’s public consultation until 21 January 2019.

What else can we learn from the fall of Carillion?

Although the auditing process is certainly an area that needs to be urgently addressed, MHA MacIntyre Hudson has pointed out that more needs to be done when it comes to reform across the wider industry. The circumstances surrounding Carillion offer up a perfect example of this.

Tuesday 15 January marks the one-year anniversary of the Carillion collapse; MHA MacIntyre Hudson has stated that the company’s demise was a more a result of “flawed business models across the whole sector.”

In particular, the UK construction sector is one that has “long suffered from a turnover before profit culture,” Brendan Sharkey, head of construction at MHA MacIntyre Hudson, has said, for there are “many large sprawling companies chasing low margin deals.”

Sharkey continued: “Carillion was the gravest illustration of the consequences. Unfortunately, despite awareness of the pitfalls of this business model, many UK construction companies don’t seem able to break away from this high-risk, low-margin culture. They’re conducted their affairs in this way for so long that low margins are part of their DNA.”

Nonetheless, Sharkey has emphasised that there are some emerging signs of promise in this sector. For example, corporates like Balfour Beatty “are now talking more about profit and not turnover and focusing on their strengths.” Whether or not this will prove to be a long-term change, and whether or not this will have long-term benefits, remains to be seen.

Sharkey admitted that the “current downturn in the economy may test their resolve, as some corporates tend to ‘buy’ work by pitching low prices, just to keep the workforce engaged and intact.”

He concluded: “When it comes to SMEs, they would be wise to focus on specific sectors of the market, building up expertise and leveraging specialised skills to gain a competitive edge, rather than putting in low bids for every major contract.”

 What other areas of industry do you think need to be improved? Let us know on Twitter!

 Twitter: @AccountancyAge

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