The Big Four firms were unanimously against being broken up into smaller firms and against the creation of an independent audit appointment body, but provided mixed responses to the ban of non-audit services provision to FTSE 350 audit clients and to joint and shared audit proposals.
Market share cap
Deloitte has recommended a market share cap in the UK audit market among Big Four firms, saying it would address choice and competition issues, reduce barriers to entry and address concerns around the resilience of the UK audit market.
PwC agreed, saying it would increase competition. But it argued that any market share cap could only work if based on the number of companies, and it could not sensibly be based on audit fees. It said, “this would not be straightforward to implement”.
But EY warned against such a move, as it believes there would be a risk of distorting competition and damaging audit quality if capacity is not available to take up available audits.
KPMG seems to be divided on the issue, saying that while it is open to engage on some measure with market share limitations, strict caps could lead to lower quality audits.
Ban on non-audit services to FTSE 350 clients
Deloitte said a ban on non-audit services provided to FTSE 350 and large unlisted public interest entity audit clients would address issues around conflicts of interest.
It argued that conflicts of interest between the firms’ public interest audit responsibilities and the advisory services they provide occur “very infrequently”, but admitted that a ban would help improve public trust in the UK’s audit market.
This would require a clear definition of “large public interest private companies” and of “audit services”, it added.
KPMG has already announced it will be stopping non-audit work for FTSE 350 clients, to “remove even the perception of a possible conflict".
It explained in its submission that it is currently working towards discontinuing these services, but this would be most impactful if implemented within a regulatory framework.
However, it also argued that this restriction should be limited to FTSE 350 audit companies since these companies tend to be at a greater level of public interest.
PwC was more vague about where it stands, saying it “appreciates that further commitments to limit non-audit services to audit clients could be necessary to promote confidence in the independence of audit firms.”
It argued that any new restrictions would need to apply to all firms auditing companies in such a market, as perception issues regarding their independence apply equally regardless of the size or nature of the audit firm.
Meanwhile, EY revealed that it does not agree with a ban, instead suggesting that reporting and disclosure should be expanded to include the full range of audit and non-audit services that a company purchases from its auditor and the major audit firms in reasonable detail – along with an explanation of why it has purchased any non-audit services from its auditor.
“If further measures were introduced in relation to restrictions on non-audit services, these should apply to all firms conducting audits of PIEs and large companies, not just one set of firms or a specific section of any market,” it said.
“This would be appropriate given the reasons for such restrictions on non-audit services apply to any firm conducting an audit, regardless of size or market share.”
Breaking-up Big Four
Deloitte argued that splitting up the Big Four is “not workable and would lead to a deterioration in audit quality”.
“We strongly believe that [the CMA’s proposals] would not be effective in improving audit quality or increasing effective competition or resilience in the market. On the contrary, both would damage audit quality,” it said.
KPMG’s view is that splitting the UK arms of major accounting firms into audit-only and non-audit services practices would create untenable risks to audit quality, and very significant practical challenges.
EY argued that audit-only firms would not be effective, and supported the multi-disciplinary model to deliver audits.
PwC said it agrees with the CMA that this suggestion would pose “potentially insurmountable challenges”, particularly those relating to the effectiveness of the measure in the face of the international networks of the largest firms and the transferability of staff.
Joint and shared audit
In its submission, Deloitte argued in favour of shared audits, where the four largest firms would partner with a firm outside this group to audit a particular component but retain overall responsibility for signing off the group accounts.
“This is distinct from joint audits, which we do not support. They add cost and are detrimental to audit quality,” it said.
EY said there is no evidence that joint audits increase quality, independence or choice. It argued that they create considerable problems around liability and effective management of an audit, which carries significant additional risk, including to challenger firms.
Meanwhile, PwC said that joint responsibility could lead to some issues “falling through the gaps” and audit quality may be adversely affected. Shared audits may alleviate that issue to an extent.
It suggested any measures that sought to increase the use of joint or shared audits could be for a limited period, for example as a transition towards a market share cap, until more firms have gained large company audit experience and therefore have increased prospects of winning sole audit appointments.
Deloitte does not support this suggestion since such a body would not have a sufficient understanding of the business to enable it to make informed decisions.
EY agreed, saying that having appointments made by a public body would be unlikely to improve choice. It explained that to move appointments to another body would relieve the audit committee of responsibility for any failings in the appointment or audit quality.
KPMG also said it would be doubtful that a public body could acquire sufficient knowledge of the affairs of each of the FTSE 350 companies, PIEs and possibly other limited companies to be able to select an appropriate auditor or manage the scope of the audit, “let alone set appropriate fees or manage the audit performance”.
PwC argued that removing responsibility from the audit committee could jeopardise audit quality. It also said that the concerns raised by CMA when it rejected the idea that the FRC should become responsible for the appointment of auditors for FTSE 350 companies would also apply any independent body responsible for auditor appointment.
NAO-style national auditor
Deloitte said it does not agree with this proposal, and explained, “It is not clear to us how this measure would improve the quality of audits as it is not clear how a NAO-style national auditor would have access to a major international network and access to the requisite specialists.”
KPMG said the proposal would be a “disproportionate and radical intervention” that would not address any of the current concerns the CMA’s study focuses on regarding audit quality, competition, choice and resilience, and that it would not be feasible to implement in practice.
“It could, in fact, lead to significant distortions of competition in audit services and could destabilise the audit profession.”
PwC also said this would not be a “workable solution” and would deprive the companies in question any choice in the appointment of their auditor.
Elsewhere, Deloitte suggested the implementation of a stronger, fully accountable governance structure around the audit practice, which seeks to address issues around incentives and conflicts and increased resilience.
It also suggested additional funding from the four largest firms to a third party that can be used to support and develop skills, training, and technology across the audit market.
Bill Michael, chairman and senior partner at KPMG, commented afterwards, “We have been clear in recognising that the industry faces challenges. Audit plays a vital role in underpinning confidence in the capital markets and it is essential that the sector remains resilient and delivers the right results for investors and society. Finding solutions will be challenging and require close collaboration from everyone with a stake in getting this right.
“Our proposals to the CMA and to the Kingman Review are both progressive and pragmatic. We look forward to hearing their conclusions in due course and contributing fully to the next stage of the debate.”
The mid-tier firms have also submitted their evidence to the CMA, as well as the accountancy organisation in the UK and Ireland. Other submissions include Standard Life, Schroders, Hermes and Nexia Smith & Williamson.