Clive Stevens 17 Jan 2019 03:21pm

Creating a more sustainable market for audit

The audit profession was delivered a broadside in December with the publication of the Kingman Review and the CMA Market Study. How we respond will determine the future sustainability of our profession

Big Four
Caption: Auditors tend only to be in the public eye when things go wrong
As the chairman of the Association of Practicing Accountants (APA), a network of 15 leading business advisory firms meeting the needs of the mid-market a real frustration for us is that when things go wrong at the top end it is the whole sector that suffers.

I am also aware that this is only half the picture. As the CMA report makes clear, auditors tend only to be in the public eye when things go wrong, not in the many instances where our interventions mitigate the risk of corporate failure – which is why it was encouraging to see both Kingman and CMA acknowledge the continued importance of audit.

So where to from here? The profession needs to reflect hard on these reports and respond positively to the criticism that has been levelled at our sector. A key challenge from the CMA is the need to increase choice across the market with joint audit as the proposed mechanism for enabling new market entrants to gain the experience to take on more of the listed company sector.

This proposal will undoubtedly enable the marzipan layer of firms below the Big Four to gain some traction here, which has to be a good thing. In my view however, this alone will not be enough to mitigate the risk of future market concentration. The profession also needs to think about how it develops a pipeline of firms capable of taking on more of this work over time.

APA member firms collectively audit a significant proportion of the real economy from SMEs to the AIM market. We also bring sector expertise in areas such as the media, education and charities. While individually our clients do not pose the same systemic risk as the top end of the listed market, in aggregate they represent a significant proportion of GDP – some 14,000 entities with turnover ranging from millions to hundreds of millions. If the overarching objective is to encourage a more competitive audit market with multiple players helping drive quality and choice, a key consideration should be how to encourage firms like ours to take on more of this kind of work over time. So what is preventing this from happening?

Recent qualitative research we undertook suggests that a significant minority of member firms would want to step up if the regulatory and market barriers to entry were less acute. Our research also suggested that compliance costs, coupled with increased liability exposure, were the biggest disincentives for APA firms to enter this market. While scale and expertise were also identified as challenges there was nothing to suggest longer term these could not be overcome.

Certainly the proposed government review of the definition of a Public Interest Entity should help here. We would like to see the proposed new regulator adopt a more proportionate approach, which encourages smaller firms to tender. Reform of the current liability regime also has to be a priority - it currently acts as a powerful disincentive for mid-tier firms to gain the experience they need to take on larger more complex audits. Shared audits could also be a possible route through here.

The message I will be taking to the BEIS Select Committee when I give evidence later this month is that taken together these kinds of measures could enable us to provide the pipeline it is clear the UK audit market needs.

Clive Stevens is chairman of the Association of Practicing Accountants