The Business, Energy and Industrial Strategy (BEIS) committee is to call on all major stakeholders in the audit sector - including the Big Four, ICAEW, the Financial Reporting Council (FRC), FTSE 350 CFOs, investors and outside experts - to give evidence in January next year. This will be after the findings of both the CMA and Kingman reviews have been published.
Speaking at ICAEW headquarters in London today, Labour MP Rachel Reeves, chair of the BEIS committee, said that the “audit market is broken” and that the collapse of Carillion earlier this year, which prompted strong criticism of the profession, implicated the entire audit industry.
“The Big Four’s overwhelming market domination has failed to deliver audits which are fit-for-purpose,” Reeves said.
“The lack of meaningful competition has bred conflicts of interest at every turn. The dice are loaded in the Big Four’s favour, as they snap up audit contracts while pocketing huge fees for consultancy work and providing advice on recovering failing businesses.
“A host of solutions are now proposed to boost competition and improve audit quality. It’s important that all options are on the table, including measures to break the stranglehold of the Big Four."
Reeves welcomed the current inquiries by the CMA and Sir John Kingman but added that too often in the past corporate and regulatory failures were followed by reviews which have then been left to gather dust rather than result in concrete action.
“Our committee’s inquiry on the future of audit seeks to ensure these reviews are acted on swiftly and effectively and that they genuinely deliver the improvements to audit quality and corporate governance which businesses, investors, pension-holders and the public expect.”
Reeves also criticised the FRC for being “toothless and passive” despite its tougher stance this year.
As part of the inquiry, stakeholders will be asked a series of questions, including:
What is the relationship between competition and quality in the audit market? How should reforms in one area complement the other?
Do you agree with the CMA proposals (when published)? Will the remedies proposed be likely to increase quality and trust in audits? Are there any potential unintended consequences?
Do you agree with the Kingman proposals regarding the FRC (when published)?
To what extent do conflicts of interest undermine trust in audit? How best can they be removed or mitigated?
How important to the quality of audit is the relationship between auditor and audited company? How can we ensure that there is the right level of challenge? What role should shareholders have in ensuring high quality audits?
Are the proposed reforms of audit consistent with other recent reforms of corporate governance? Are there any other consequential reforms required?
The Kingman review was announced in April following growing criticism over the FRC’s failure to spot trouble at Carillion. The CMA launched its own review in October after months of speculation.
In response to today’s announcement, FRC chief executive Stephen Haddrill said, “We look forward to contributing to this latest review of the audit market. We agree that it is important that the recommendations of the Sir John Kingman review of the FRC and the CMA review of the audit market should be implemented quickly.
“The FRC has, over many years, held audit firms to account. However, as we have consistently proposed, there are areas where the regulatory framework should be strengthened. We would therefore welcome Parliamentary support in the event the Kingman review agrees that our statutory remit should be enhanced,” he added.
ICAEW chief executive Michael Izza also welcomed the BEIS committee's new review and the transparency it will bring. “As a profession, chartered accountants recognise the need for change," he said.
"Sir John Kingman and the CMA will shortly make recommendations to tackle underlying issues of regulation, quality and competition in the listed audit market. We have said previously that the natural follow-on to their work should be a fundamental and independent examination of the role of audit itself. The expectations of investors and wider society have quite rightly increased in recent years, and we need to ensure that audit keeps pace.
“The BEIS select committee has played a leading role on this issue. We welcome the transparency that their new inquiry will bring, and hope that it will build on the findings of the reviews now underway. It has the potential to make an important contribution to the wider debate on the future of audit.”