The Competition and Markets Authority (CMA) has published an update paper outlining serious competition concerns, and has proposed changes to legislation, to improve the audit sector to benefit both savers and investors.
Following the launch of its market study in October, the CMA has highlighted multiple reasons as to why it believes audit quality is deteriorating.
The paper explained that as a result of companies being able to choose their own auditors, quality is on the decline. The authority revealed that firms tend to choose auditors with whom they have the best ‘cultural fit’ or ‘chemistry’ rather than those who offer the toughest scrutiny. Furthermore, it emphasised that choice is too limited, with the Big Four (Ernst & Young, Deloitte, KPMG and PwC) audit firms conducting 97 per cent of the audits of the biggest companies.
According to the CMA, auditors’ focus on quality “appears diluted” due to the fact that at least 75 per cent of the revenue of the Big Four comes from alternative services, such as consulting.
In a bid to combat these concerns, the CMA has proposed legislation to: separate audit from consulting services; introduce measures to substantially increase the accountability of those chairing audit committees in firms, and impose a ‘joint audit’ regime to provide firms outside of the Big four a role in auditing some of the UK’s largest organisations.
Commenting, CMA chairman Andrew Tyrie: “Addressing the deep-seated problems in the audit market is now long overdue. 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.”
CMA chief executive Andrea Coscelli added: “We have moved fast to come up with a comprehensive package of proposals for legislation, which we will now consult on. Successful reform of the audit market will require legislation, in combination with planned improvements to regulation.”