Today the Competition and Markets Authority (CMA) launched a review into the audit sector amid concern that it is not working well for the economy or investors. It will examine whether the sector is competitive and resilient enough to maintain high quality standards.
Audit firms have been in the spotlight for a number of scandals over the past months, including the collapse of the construction company Carillion and the retailer BHS.
The CMA said the review will focus on why the largest companies still turn almost exclusively to one of the Big Four firms when selecting an auditor, and whether the firms are “too big to fail”.
Michael Izza, ICAEW chief executive, said the news was a “very positive development”.
“I believe the accountancy profession as a whole will welcome it. It will need to coordinate closely with other processes already under way, such as the review of the operation of the Financial Reporting Council (FRC) by Sir John Kingman, and the initiatives set out yesterday by the FRC itself.”
The FRC said it would “work closely” with the CMA as it carries out the study.
“We have expressed concern about concentration at the top of the audit market so we welcome this announcement. It is essential that there is widespread confidence in the quality of company audit in UK,” an FRC spokesperson said.
Bill Michael, chairman and senior partner at KPMG – which received particularly harsh criticism for its work on Carillion – said, “I have been honest that the industry faces challenges. Personally I believe we all want to build trust in corporate Britain and be part of an environment that delivers the right results for capital markets, investors and society.”
The FRC, which yesterday announced its own review of the audit sector, reported “deterioration in the quality of the audits that we inspected to an unacceptable level” at KPMG earlier this year.
Deloitte said it is supportive of measures “that encourage choice as well as a robust audit market and welcome the CMA’s study”.
A spokesperson added, “Achieving this will be complex and any future framework also needs to include a focus on audit quality across all listed companies.”
Stephen Griggs, head of audit at the firm, continued, “The CMA and Kingman reviews taken together offer the opportunity to work with all market participants to develop integrated solutions to improve the quality of financial reporting in the UK."
A spokesperson from PwC said the firm supported the review and was “committed to helping regulators find practical remedies which serve the best interests of shareholders, companies and the market. Audit quality needs to be front and centre of any changes.”
Meanwhile, EY said in a statement that it has “long recognised the need to increase choice in the audit market” because “fundamentally, a more attractive market means more players, providing more choice and delivering better outcomes for society”. It added that it remained committed to the multidisciplinary model.
BDO and Grant Thornton also welcomed the news, but were more vocal about what changes they want to see.
Scott Knight, head of audit at BDO, warned it is “absolutely vital” that any remedy to improve competition works “hand-in-glove” with reform of the FRC so that quality and competition are dealt with together.
“By only having powers over chartered accountants and not financial directors or CEOs, the FRC is currently like the director of a play who doesn’t have control over all the actors on the stage. This must change,” he said.
“To help address competition we would like to see an 80% cap on market share of the number of FTSE and public interest companies that the Big Four can audit. This is both a positive and practicable step towards improving competition and, unlike other versions of a cap we have seen, we would like to see this proposal implemented within a two to three year period and to include big private companies as well as the FTSE 350.”
However, a Grant Thornton spokesperson re-iterated it would not support spinning off the audit arms of the major firms.
“We don’t support the idea that breaking up audit firms will address the areas that the CMA are looking at, and in fact believe quite the opposite, that audit quality and levels of competition could be impacted,” they said.
“We hope that during the [review] the CMA will look further at the ideas we have already put forward such as exploring setting up a fully independent procurement process, with more frequent rotation, with joint audit delivery, or a complete ban on non-audit fees from PIE clients. The economy needs an audit market place that is fair and open and we look forward playing our part in this discussion.”
Phil Verity, Mazars UK senior partner, added that, "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”.
Jonathan Ericson, head of audit at RSM, said, “We welcome this timely and very important review by the Competition and Markets Authority into the operation of the audit market for UK companies. It is clearly in the public interest that all necessary and appropriate steps are taken to restore confidence in the quality of UK auditing.”
However Frank Field, chair of the Work and Pensions Committee, argued that the firms should be broken up.
He said it was “clear that the shoddy PwC audit of BHS and the shocking failures exposed in our work on Carillion are far from isolated incidents” and that “better enforcement, though badly needed, is no substitute for breaking the Big Four’s stronghold on the market”.
Rachel Reeves, chair of the Business, Energy and Industrial Strategy committee, agreed. She argued that it is “vital that the CMA breaks the stranglehold of the Big Four and is bold in looking at all options […] including the break-up of the Big Four and detaching audit arms from the provision of other services.”
CMA chief executive Andrea Coscelli said the authority plans to “move swiftly” and issue its provisional findings before Christmas.