London, 19 December 2018 – ICSA: The Governance Institute has today expressed concerns that the UK audit market will not improve unless issues of education, training and trust are first addressed. It also believes that the statutory audit services update paper published yesterday by the Competition and Markets Authority (CMA) presents a missed opportunity to rectify the situation.
The study demonstrates a clear need for reform of the audit market, and this update paper poses 27 questions for the market to consider by 21 January 2019 relating to the study and the six proposed remedies that the CMA has identified: regulatory scrutiny of audit committees; mandatory joint audit or market share cap; additional measures to remove barriers for challenger firms; market resilience; full structural or operational split; and peer review.
As the professional body for governance, ICSA’s focus is on the governance issues raised by recent audit failures rather than the impact of specific accounting decisions and not only on what audit is supposed to achieve and how well it does so, but also on the difference between what audit is supposed to achieve and the public expectation of audit and of auditors. The CMA review falls into the trap of assuming that companies select and pay their own auditors, thereby overlooking the independent role of the audit committee. It also makes the assumptions that more regulation will help the market and that one of the major issues with audit is a result of the dominance of the ‘big four’ audit firms, hence proposals for mandating joint audits and encouraging the use of challenger firms.
In its response to the invitation to comment, ICSA suggested three initial areas needed to be given more attention before proceeding to further action:
- Education – clarification of the role of audit as the political, press and public expectation of the role of audit is very different from what an auditor would perceive it to be.
- Training – as a number of the ‘accounting scandals’ seen in recent years have at their heart questions of judgement. Whether particular value could, or should, be regarded as crystallised in the accounts should, in ICSA’s view, be a question of fact rather than of opinion – either it is yours or it isn’t. It should not be possible for one accountant to draw up the books for a period and have them audited against current accounting standards and for another to perform the same exercise, for the same period, have it audited by a different auditor and find many millions of pounds difference. Shareholders never benefit from such restatements. Much more training is required to foster a greater spirit of professional scepticism among auditors and accounting standards need to be revisited to give greater clarity on where judgement has been applied by both the preparer and auditor.
- Trust – the chief weakness of the audit market is the lack of confidence, not just on the part of companies, but also on the part of investors and some regulators, in the ability of auditors outside the Big Four to provide an audit of an adequate standard for large, particularly multi-national, companies. The accuracy of this perception should be tested by an independent body and the CMA may be well placed to undertake this task. If it can be shown that mid-tier firms are up to auditing the very largest companies then we believe that companies, investors and regulators will welcome them with open arms. If, on the other hand, it is shown that they are not, alternative solutions will be necessary.
Peter Swabey, Policy and Research Director at ICSA: The Governance Institute said: “Unless the issues of education, training and trust are addressed before a decision is made on future action, the review risks creating solutions which fail to address the underlying issues, consideration of which, we believe, should underpin further analysis. Action which promotes the inclusion of challenger firms in the audit market will not serve to improve that market if those firms are performing at a lower standard. This may not be the case, but it does seem to be a widespread perception and should, we believe, be properly tested before further action is taken. It is imperative that the opportunity is taken to bring together all the various reviews of this issue – Kingman, the CMA, the new review being led for the Department for Business by Donald Brydon and the BEIS Committee – to avoid confusion.”
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For further information, please contact Maria Brookes, Media Relations Manager:
mbrookes@icsa.org.uk
+44 (0)20 7612 7072
+44 (0)7890 649 143
Notes to Editors:
- ICSA: The Governance Institute is the professional body for governance. We have members in all sectors and are required by our Royal Charter to lead ‘effective governance and efficient administration of commerce, industry and public affairs’. With over 125 years’ experience, we work with regulators and policy makers to champion high standards of governance and provide qualifications, training and guidance. Website: www.icsa.org.uk
- ICSA’s response to the CMA invitation to comment can be found at www.icsa.org.uk/assets/files/pdfs/guidance/consultations-2018/ICSA_Response_CMA-FINAL.pdf