Speakers at a recent discussion on the future of audit, held by the All Party Parliamentary Group on Business, Finance and Accountancy (APPG BFA), said that they believed in audit and wanted to ensure its continuation but recognised that both the process and the marketplace would have to change.
“I think we are at a watershed moment for the profession,” said ICAEW chief executive Michal Izza. “There are so many things happening at the moment, so many moving parts, that we have to be proactive and engage with them because if we don’t, decisions are going to be taken without us which may result in the profession being changed beyond all recognition and potentially diminished.
“The good news is that the profession is very open to change, very open to looking all sorts of different remedies and responses.”
Gilly Lord, head of ICAEW’s Audit and Assurance Faculty and a PwC audit partner, rejected APPG BFA chair Nigel Mills’ suggestion that audit was a “dying art” and put up a strong defence of her profession.
“Because I believe passionately in the point of audit and what audit does, I think the one thing we have got to hold on to is the need for really high quality audits, in fact even better quality audits than we’ve done before and to make sure audits remain relevant in the future,” she said.
“We’ve had them around for 175 years; I’d like than to stay around for longer but to do that they probably need to change.”
On the supply side at the top end of the market, it was clearly no longer tenable for there just to be four large firms but the question was how to entice smaller firms back into the listed company market?
Many – like Grant Thornton – have taken the decision to withdraw from the listed market because they are fed up with spending large amounts of time and money on joining in tenders only to come “a glorious second with wonderful feedback” to a Big Four competitor.
BDO revealed that over the previous 10 days, it had lost out to Big Four firms in two big audit tenders, while Jan Babiak, a former EY audit partner and now an audit committee chair among other boardroom appointments, said that if she picked any firm outside the Big Four, “it would not be viewed well by the investors”.
Craig Mackinlay, who still practises as an accountant when he is not being an MP, agreed. “In my practice we’ve had some fantastic clients who have grown from nothing into big clients and immediately they’ve grown to a certain size and you get a new investor in, the investor then calls for the Big Four to come over and do the work,” he said. “So if you are a second or third tier firm, you haven’t got a chance of growing any bigger because you lose your big work as soon as your clients get big.”
Graham Durgan, chairman of Emile Woolf Holdings, thought the only quick solution was to opt for joint audit so that the Big Four could share their know-how and help transfer consistency, technical knowledge and technical ability to other firms around the world. This would upskill smaller firms to take on larger audits.
Mazars partner Anthony Carey said his firm was “very keen” to explore the possibility of a market cap arrangement. “[This], we think, offers a significant opportunity for allowing a reasonable amount of discretion with the buyer while giving a guarantee that some non-Big Four involvement would come into the listed market,” he said.
Carey suggested aiming for 20% of the listed market in total for non-Big Four firms, introduced progressively over a five-year period, and say a cap of 25% for any one of the Big Four.
Sue Almond and Jon Roberts, international and national head of assurance respectively at Grant Thornton, pointed to the restructured public sector audit market where the independent Public Sector Audit Appointments (PSAA) appoints the auditor, not the public sector body.
“Taking the buying away from a sometimes cosy relationship with the company actually results in a completely different marketplace,” Almond said.
Roberts explained, “As an auditor you feel very independent because you have the relationship with the [PSAA] and that process has helped to create a market where there’s been movement.
“There are different players, it’s not Big Four dominated and, from the point of view of the bodies themselves, they still enjoy that constructive and professional working relationship with their auditor albeit on a fully independent basis.”
A number of those at the discussion thought the problems lay with the demand side. ICAEW council member and SWAT UK director Julia Penny felt that increasing competition wouldn’t solve the quality issues, if that was the problem.
“We do need to look more imaginatively at why things are going wrong. A lot of it surely has to be that people are expecting something different from the audit to that which we are delivering. The competition issue, the choice issue, is tweaking round the edges,” she said.
Penny pointed out that the one of the unforeseen consequences of the last attempt to tighten up the audit regime and improve audit quality with implementation of the Audit Regulation and Directive, ended up reducing choice and competition regulation. Extending the scope of the Financial Reporting Council’s draconian regulatory regime to all firms with a public interest entity (PIE) audit resulted in a number withdrawing from the market because the time and resources involved in an inspection made carrying in PIE audits less attractive.
“So we immediately reduced choice and competition. Did that have an impact on quality when it went somewhere else? Probably not,” she said. “It’s not that competition isn’t important but it’s a different issue, I think. We’ve really got to examine what it is that people want.”
But she warned that while any future audit can be redesigned to meet society’s needs, the public also had to accept “that companies will go bust because that’s life”.
Lord welcomed the prospect of the Competition and Markets Authority (CMA) revisiting the audit market. “What I hope would happen would be for them to take a number of different ideas, package them together and say if we combine may be market cap, may be some shared audit, a number of issues that would help reduce the barriers [for non-Big Four firms],” she said. “One solution by itself will not solve the problems.”
Almond cautioned stakeholders not to rush into solutions without first really understanding the root causes. However, she reiterated that the profession had been given “a great opportunity to reimagine what audit might be”.
Izza added that people recognised that change was inevitable and there was “a real willingness to change”.
He referred to the unprecedented number of reviews – Kingman, CMA, Prem Sikka for the Labour party, the Audit Quality Forum and the Monitoring Group – either ongoing or proposed, alongside Brexit “which gives us the opportunity to redefine how we want audit to operate in this country”.
“We mustn’t waste this opportunity to rediscover professionalism,” he added, “We’ve got to reimagine the audit and we’ve got to find a way of going from four to more.”
The discussion about the future of audit will get its next airing on Thursday when the House of Commons debates the joint report on Carillion from the Work and Pensions and Business, Energy and Industrial Strategy select committees.