ICSA: The Governance Institute has expressed concerns that the UK audit market will not improve unless issues of education, training and trust are first addressed. The Institute also believes that the statutory audit services update paper published by the Competition and Markets Authority (CMA) presents a missed opportunity to rectify the situation.
The study demonstrates a clear need for reform of the audit market. The update paper poses 27 questions for the market to consider by 21 January 2019 relating to the study and the six proposed remedies that the CMA has identified: regulatory scrutiny of audit committees, mandatory joint audit or market share cap, additional measures to remove barriers for challenger firms, market resilience, full structural or operational split and peer review.
As the professional body for governance, ICSA’s focus is on the governance issues raised by recent audit failures rather than the impact of specific accounting decisions and not only on what audit is supposed to achieve and how well it does so, but also on the difference between what audit is supposed to achieve and the public expectation of audit and of auditors.
The CMA review falls into the trap of assuming that companies select and pay their own auditors, thereby overlooking the independent role of the audit committee. It also makes the assumptions that more regulation will help the market and that one of the major issues with audit is a result of the dominance of the ‘Big Four’ audit firms, hence proposals for mandating joint audits and encouraging the use of challenger firms.
Initial areas for attention
In its response to the invitation to comment, ICSA has suggested three initial areas needed to be given more attention before proceeding to further action:
*Education: Clarification of the role of audit as the political, press and public expectation of the role of audit is very different from what an auditor would perceive it to be.
*Training: As a number of the ‘accounting scandals’ seen in recent years have at their heart questions of judgement. Whether particular value could, or should, be regarded as crystallised in the accounts should, in ICSA’s view, be a question of fact rather than of opinion – either it is yours or it isn’t. It should not be possible for one accountant to draw up the books for a period and have them audited against current accounting standards and for another to perform the same exercise, for the same period, have it audited by a different auditor and then find many millions of pounds difference. Shareholders never benefit from such restatements. Much more training is required to foster a greater spirit of professional scepticism among auditors, while accounting standards need to be revisited to give greater clarity on where judgement has been applied by both the preparer and the auditor.
*Trust: The chief weakness of the audit market is the lack of confidence – not just on the part of companies, but also on the part of investors and some regulators – in the ability of auditors outside the ‘Big Four’ to provide an audit of an adequate standard for large (and particularly multinational) companies. The accuracy of this perception should be tested by an independent body and the CMA may be well placed to undertake this task. If it can be shown that mid-tier firms are up to auditing the very largest companies then ICSA believes that companies, investors and regulators will welcome them with open arms. If, on the other hand, it’s shown that they are not, then alternative solutions will be necessary.
Addressing the underlying issues
Peter Swabey, policy and research director at ICSA: The Governance Institute said: “Unless the issues of education, training and trust are addressed before a decision is made on future action, the review risks creating solutions which fail to address the underlying issues, consideration of which, we believe should underpin further analysis. Action which promotes the inclusion of challenger firms in the audit market will not serve to improve that market if those firms are performing at a lower standard. This may not be the case, but it does seem to be a widespread perception and should, we believe, be properly tested before further action is taken.”
Swabey concluded: “It’s imperative that the opportunity is taken to bring together all the various reviews of this issue – Kingman, the CMA, the new review being led on behalf of the Department for Business, Energy and Industrial Strategy by Donald Brydon and the BEIS Committee – in order to avoid confusion.”
David Sproul, senior partner and CEO of Deloitte, said: “We need a competitive, high quality audit sector that works for shareholders, wider society and businesses and maintains the UK’s position as a leading capital market. It’s clear that trust and confidence in the role of the profession is not where it should be and we are supportive of change that enhances audit quality and maintains the competitive position of the UK as we prepare to leave the EU.”
Sproul added: “This is a critical moment for the profession in the UK and internationally. The CMA provisional findings, the Kingman review and the announcement of Project Flora offer a unique opportunity to develop an audit market and structure that meets the needs of 21st Century stakeholders. We will carefully analyse the detail within the CMA proposals and look forward to working with the CMA in conjunction with the findings of the other reviews to develop a world-leading profession in the UK.”
Response from EY
A statement on EY’s website reads: “The CMA’s market study, together with Sir John Kingman’s review of the Financial Reporting Council, has provided a valuable opportunity to examine the role of audit in the UK and to reinforce the focus of auditors and company directors on audit quality. We believe that the evolution of the audit product is vital to achieve effective and sustainable reform of the corporate reporting environment globally. We welcome the announcement of the new independent review by Donald Brydon into what the future standards and requirements should be for audits in the UK.”
In addition, the statement outlines: “EY will support workable measures that genuinely improve audit quality, strengthen the role of the audit committee and modernise the audit product to meet the expectations of a wide range of stakeholders. EY believes change that addresses these points is necessary to help rebuild society’s trust in business and we will contribute to the consultation to help to achieve this outcome.”
EY also comments: “We are closely reviewing the recommendations of both studies and are committed to working with regulators, standard-setters and other stakeholders to ensure that the audit profession is able to continue to serve the evolving needs of business, investors and the public interest.”