London, 17 September 2019 – The Chartered Governance Institute has advised the Department for Business, Energy and Industrial Strategy to wait before implementing the proposals contained in the CMA Market Study into Statutory Audit Services, believing that now is not the right time.
According to Peter Swabey, Policy and Research Director at The Chartered Governance Institute:
“The recommendations in the Kingman review of the Financial Reporting Council propose substantial changes to the operations of the regulator and this will impact the statutory audit market. In addition, Sir Donald Brydon has yet to complete his independent review of the quality and effectiveness of audit. The implementation of proposals resulting from the CMA Market Study should only be considered after the Brydon review has reported so that its recommendations can be assessed together with those of the Kingman review and the CMA. Acting in haste will damage the Government’s ability to develop a joined up response to issues in the audit market.
“Furthermore, the CMA’s proposals risk allowing legitimate concerns about the concentration of the audit market to become conflated with the central issue of audit quality. Many of the CMA proposals aim to increase competition in the market, but they will not all necessarily improve the quality of audit which is surely the more urgent task facing Government.”
The Institute’s prescription for improvements in the audit market, as stated in all consultation responses on this subject, is to focus on three principal issues:
- Clarification of the role of audit in order to reduce the huge perception gap that exists. Auditors might believe that their role is simply to check the accuracy of the historical information provided to them whereas the average man in the street might believe that the purpose of audit is to stop companies from going bust. Accounting and auditing legislation, regulation and standards are very important here. A detailed examination of the appropriateness of the use of fair value accounting would be an extremely useful first step in improving the quality of audit and accounting standards revised as necessary to give greater clarity on where judgement has been applied by either the preparer or auditor.
- Training – Much more training is required to foster a greater spirit of professional scepticism among auditors. The delivery gap and expectation gap are equally important issues and neither should be overlooked. To what extent audit standards, regulation and legislation meet legitimate societal expectations and to what extent auditor performance delivers high-quality audits against existing requirements is a matter for the regulator. The implementation of the Kingman review and the establishment of the Audit, Reporting and Governance Authority with enhanced powers to penalise poor performance will address this issue.
- Trust – the lack of confidence on the part of companies, investors and some regulators in the ability of smaller auditors to perform to the same standard as the Big Four is an issue of trust and without the accuracy or inaccuracy of this perception being tested by an independent body, any potential misconceptions will continue to abound. It is essential that the validity of any gaps in auditing ability is investigated as the inclusion of challenger firms in the audit market will not serve to improve that market if those firms genuinely are performing at a lower standard.
Peter Swabey concludes: “It is imperative that the opportunity is taken to bring together all the various reviews of the audit issue otherwise solutions might be created which fail to address the underlying issues. Putting the cart before the horse will be a missed opportunity and benefit no-one in the long run.”
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Notes to Editors:
- The Chartered Governance Institute is the qualifying and membership body for governance with over 125 years’ experience of educating and supporting governance professionals. With a Royal Charter purpose of leading ‘effective and efficient governance and administration of commerce, industry and public affairs’, we provide professional development, guidance and thought leadership, and work with regulators and policy makers to champion high standards. Website: www.icsa.org.uk
- The full consultation response can be viewed at www.icsa.org.uk/assets/files/pdfs/guidance/consultations-2019/icsa_response_to-beis_market_study_on_statutory_audit_services_final.pdf