The Competition and Markets Authority (CMA) has published its final report with recommendations to address “serious competition problems” in the UK audit industry.
The regulator said legislation was needed to address both the “vulnerability of the industry to the loss of one of the Big Four”, and the current inadequate choice and competition.
The CMA is recommending the separation of audit from consulting services, mandatory ‘joint audit’ to enable firms outside the Big Four to develop the capacity needed to review the UK’s biggest companies, and the introduction of statutory regulatory powers to increase accountability of companies’ audit committees.
Its recommendations, outlined in its final report, follow extensive discussions with audit firms, investors and major UK companies on its update paper – published in December. It also takes into account the recommendations of a report from the Business Select Committee, and the inquiry into regulation led by Sir John Kingman.
The recommendations include an operational split, with auditors focusing exclusively on producing the most challenging and objective audits, rather than being influenced by their much larger consultancy businesses. This will require separate management, accounts and remuneration: a separate CEO and board for the audit arm; separate financial statements for the audit practice; an end to profit-sharing between audit and consultancy, and promotions and bonuses based on the quality of the audits.
More choice and a mandatory joint audit was also recommended to allow ‘challenger’ firms to enter and work alongside the Big Four firms. In addition, any company choosing a sole ‘challenger’ auditor should be exempt. Audits of exempt companies may be subject to rigorous, real-time peer reviews commissioned by and reporting to the regulator. The CMA said the joint audit requirement would remain in place until it decided choice and competition had improved enough to cope with the loss of one of the Big Four.
It also called for regulation of UK companies’ audit committees and a five year review of progress by the regulator.
CMA chairman, Andrew Tyrie, said: “People’s livelihoods, savings and pensions all depend on the auditors’ job being done to a high standard. But too many fall short – more than a quarter of big company audits are considered substandard by the regulator. This cannot be allowed to continue.
“The government now has three reports to hand. In large part, they come to similar conclusions. Conflicts of interest cannot be allowed to persist; nor can the UK afford to rely on only four firms to audit Britain’s biggest companies any longer. Early action will require legislation – hence the CMA’s proposals.”
CMA’s chief executive, Andrea Coscelli, added: “The UK is recognised as having a strong history in the fields of corporate governance and accounting. Our recommendations, along with improvements to regulation and clarifying the purpose and scope of audits, will ensure the UK strengthens its position.
“We look forward to supporting the government as it considers how best to take forward these changes through legislation, alongside Sir John Kingman’s recommendations on regulation and the results from Sir Donald Brydon’s review on the quality and effectiveness of audit.”
The CMA’s final report, and further information relating to the market study, are available on the audit market study case page.