Response to company failures
Competition watchdogs join call for audit shake-up
PwC was fined over its audit of Bhs just before it collapsed (pic: Terry Murden)
Competition watchdogs have added their voice to calls for a shake-up in Britain’s under-fire audit industry following a number of high profile failures to spot companies in trouble.
The Competition and Markets Authority (CMA) said auditing should be ringfenced from consultancy services, but it has recommended a system of ‘joint auditing’ involving two firms, which has raised concerns that it would add to company costs.
“Auditors should focus exclusively on producing the most challenging and objective audits, rather than being influenced by their much larger consultancy businesses,” the CMA said.
The CMA’s recommendations follow the collapse of firms such as construction firm Carillion, which was audited by KPMG and Bhs, audited by PwC. Regulators found PwC’s lead auditor of Bhs spent two hours on its 2014 audit and 31 hours on more lucrative non-audit work, leaving the bulk of auditing work to juniors. PwC was fined a record £6.5 million for its failings.
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.”
Its three main recommendations are a split between audit and advisory businesses, with separate management and accounts; and a mandatory “joint audit” system for FTSE 350 companies, with a Big Four and a non-Big Four firm working together on an audit
In 2016-17, the Big Four accountancy firms – Deloitte, EY, PwC and KPMG – accounted for 97% of FTSE 350 audits and 99% of FTSE 100 audits.
A separate report has called for the abolition of the Financial Reporting Council (FRC), which regulates the accountancy sector. The report, headed by Legal & General chairman Sir John Kingman, recommended its replacement by a new Audit, Reporting and Governance Authority.
MPs have also called for change. Rachel Reeves, chairman of the Business, Energy and Industrial Strategy Committee in the House of Commons, said: “We welcome the CMA’s recommendations aimed at addressing what are serious failings in the audit market and ending the stranglehold of the Big Four.
“We agree that it is high time that their audit work is separated out from their consultancy services to tackle the conflicts of interest that have persisted for too long.”
Commenting on the CMA report, John Allan, CBI President, said: “The UK’s position as a world leader on corporate governance is highly-prized. But with the eyes of the world on the UK, some CMA proposals risk damaging that reputation.
“Improving the quality of audit to enhance public trust and investor confidence must be paramount. But the guiding star for any reforms must be a focus on what works.
“Mandating joint audits will add cost and complexity for business with no guarantee of better outcomes. Operational splits could restrict access to the skills required to carry out complex audits.
“Other ideas, such as greater scrutiny of audit committees by the regulator have merit and could help guard against high-profile corporate failures, which have rightly prompted searching questions.
“With the Brydon review yet to report a false move now could create yet more uncertainty and undermine confidence in corporate Britain.”
Marcus Scott, chief operating officer of finance sector industry body TheCityUK, said: “Radical solutions imposing operational splits on the big audit firms may make for good headlines, but they are poorly focused, with no evidence that they will lead to genuinely enhanced audits.
“Change should be embarked upon with care, conscious of the risks of unintended consequences and with an eye to maintaining the huge value these firms provide.
“As such, reform should focus on quality, transparency and accountability – three vital areas that will bring benefits for audited companies, investors and lenders.”