CMA Market Review 2018
The Competition and Markets Authority (CMA) has conducted a market review into the state of audit in the UK. As part of this process, it consulted accounting firms, academics, companies and regulators to understand the issues in the sector and to identify opportunities for reform.
Following this consultation process, the CMA has published an update paper outlining its view of the main problems in the sector, and how it proposes to solve them.
Mazars has been actively involved in this process, and has shared strong views on the viability of joint audit as one solution
Why does this matter?
There is widespread consensus that the audit sector is not reaching its potential, and that previous attempts at reform have been ineffective. The impact of high quality audit goes far beyond the boardroom. As CMA Chairman Andrew Tyrie explains: “Most people will never read an auditor’s opinion on a company’s accounts. But tens of millions of people depend on robust and high-quality audits. If a company’s books aren’t properly examined, people’s jobs, pensions or savings can be at risk”.
Trust in the quality of audit underpins confidence in UK business, the money invested in listed firms by private and institutional investors, and the livelihoods of the people who work for and with the audited companies.
The CMA has highlighted three key issues with the audit sector
- Competition drives quality upwards, but 97% of listed audits are performed by only four firms, essentially removing competition from the market
- Companies are liable to choose ‘friendly’, less challenging, auditors, whereas an effective audit should be sceptical and independent
- Audit quality should be the prime focus of an auditor: however, upwards of 75% of the revenue of the largest four accounting firms comes from other services, such as consulting
In response to these issues, the CMA has made three proposals
- Encouraging choice outside just four firms for large listed businesses: Joint Audit, whereby a second firm is appointed to work on an engagement, is a strong possibility. Alternatively, market share caps, reserving a percentage of the total market for firms outside the Big 4, could be a consideration
- Introduce regulatory oversight of auditor appointment and management: ensuring that companies choose sceptical, challenging auditors as their first priority
- Enforcing an operational split between the audit and advisory parts of accounting firms: removing the potential conflict between delivering a comprehensive, challenging audit and winning further advisory work
What happens next?
The CMA’s update paper invites comments by 21 January 2019. Mazars will continue to share its views and lend support to ongoing reform in the audit market.
What is our view?
Mazars is supportive both of principles guiding the CMA’s review, and of the specific reforms which it has proposed.
We agree that audit reform is necessary and overdue, and that creating a vibrant, competitive and accountable market should be the overwhelming priority. We also agree with the broad proposals to achieve this goal.
Joint Audit is a proven system which has demonstrably provided competition, high quality audits, and value for money for some of the world’s largest listed businesses. Its implementation in the UK would open the audit market to a greater range of players. We are also supportive of the view that companies should look beyond convenience as a guiding factor in choosing an auditor. Challenge, impartiality, and rigorous standards are the foundation of good audit – and consequently a vibrant business environment – and the CMA is right to focus on measures which ensure companies recognise this.
Want to know more?
Joint Audit: The Facts
In the UK, Joint Audit represents a different and unfamiliar way of approach the audit process. It is also widely misunderstood thanks to a continued focus on decades-old anecdotes based on a limited experience of joint audits undertaken in very different circumstances to those in the present.
Joint Audit in the UK
Our goal is to help create a vibrant, innovative audit market which meets the needs of shareholders, broader stakeholders, and wider society. To do this, we must kick-start the creation of a competitive market which encourages new players to take on the audits of large Public Interest Entity (PIE) companies.