CMA proposes overhaul of UK audit market

The Competition and Markets Authority has recommended a shake-up of the UK’s audit market, proposing several reforms to address the “vulnerability” of the industry and the “current inadequate choice and competition”.

The CMA’s recommendations follow extensive discussions with audit firms, investors and major UK companies on its update paper – published in December. They also take account of the recommendations of a major report from the Business Select Committee, and the inquiry into regulation led by Sir John Kingman.

The CMA’s main recommendations are for an operational split between audit and 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.

It has also proposed mandatory joint audits between the Big 4 and challenger audit firms, to “increase the capacity of challengers” and choice in the market, which it believes will drive up audit quality.

It also believes that the regulator should hold audit committees more vigorously to account. This may include ensuring that committees report their decisions as they hire and supervise auditors, and that the regulator issues public reprimands to companies whose committees fall short of adequate scrutiny of their auditors. In addition, the CMA believes the regulator should review the effects of the changes periodically, in the first instance five years from full implementation.

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 sub-standard 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.”

The proposals have been welcomed by Local Authority Pension Fund Forum acting chair, Paul Doughty, who said that the LAPFF has been “impressed by the thoroughness and independence of the CMA’s work, in the face of tremendous lobbying by the accounting industry”.

“Where we see resistance to the proposals from the accounting industry to the recommendations of the CMA we deduce that is because they fear they will be effective. There has been deep dissatisfaction with auditing, company accounts, the standards and the captured regulation. The FRC has in the process been rightly abolished to be replaced with a new regulator. Independent reviews are working and must improve the outcomes of a discredited system of auditing and reporting.”

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