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UK opens investigation into audit market

UK opens investigation into audit market

The UK’s competition watchdog has launched an investigation into the accounting industry over claims that the dominance of the Big 4 has led to a decline in audit quality.

After months of debate, the Competition and Markets Authority (CMA) has decided to investigate the auditing market following the scandal over KPMG’s contract with construction company Carillion, which collapsed earlier this year.

“If the many critics of the audit process are right, it is not just the companies which buy audits that lose out; it is the millions of people dependent on savings, pension funds and other investments in those companies whose audits may be defective,” said Andrew Tyrie, chairman of the CMA.

The CMA has set a deadline of October 30 for the UK’s biggest firms to provide feedback and the watchdog aims to release provisional findings before Christmas. The Big 4 have broadly welcomed the competition review after several months of private talks on audit reform.

“We are supportive of measures that encourage choice as well as a robust audit market,” said Stephen Griggs, managing partner of audit at Deloitte. “Achieving this will be complex and any future framework also needs to include a focus on audit quality across all listed companies.”

Bill Michael, UK chairman at KPMG, said: “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 CMA views this investigation as the next step from Sir John Kingman’s independent review of the Financial Reporting Council (FRC). The regulators are considering banning accounting firms from providing consulting services to audit clients.

“We continue to identify problems with insufficient challenge of management and professional scepticism exercised by auditors when auditing key judgement areas (for example, goodwill impairment or long-term contracts),” the FRC told the press.

At the centre of the debate on auditing is the potential for conflicts of interest in the accounting industry. However, the CMA has hinted it will not support breaking up the Big 4 due to concerns this would undermine the quality of audit services in the UK.

“We’re up for change and we’re up for more choice in the audit market, but breaking up firms does not improve audit quality,” said Kevin Ellis, UK chairman at PwC. “We need to think through changes that create choice but do not damage quality.”

This may limit the UK to a few options, including a market share cap to reduce concentration or an independent public body to appoint auditors for the biggest companies. Given that the Big 4 count most of the UK’s largest companies among their client bases, this is no small matter.

Even mid-tier firms like Grant Thornton and BDO, who stand to gain from reforming the market, part ways over the details of what the reforms should look like.

“We’re not in favour of a market share cap alone to address the high levels of concentration,” said Jon Roberts, head of audit at Grant Thornton. “We need some kind of market management with an independent body.”

“A cap on the number of companies that any one firm can audit will inevitably result in an increase in audit quality,” argued Gervase MacGregor, head of advisory services at BDO. “Having a public body policing auditor selection may deliver change, but it would be deeply unpopular with the buy-side.”

Meanwhile, the Shadow Chancellor John McDonnell has ordered a separate investigation into the accounting industry and its regulatory standards. “We need a complete overhaul of the entire regulatory framework for finance and business, to promote openness, transparency, accountability and – yes, where necessary – to impose appropriate punishments,” he told the press.

Long-term critic Professor Prem Sikka is chairing the inquiry and the report may be out before the end of 2018. This may add to the pressure on the CMA to find answers sooner rather than later.

At the start of 2018, there was near certainty about what the audit market would look like for years to come. Now the terrain is starting to shift underneath the feet of British accountants just as the year has entered its final months.

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