On 10th September, The Chartered Governance Institute (previously ICSA) responded to an initial consultation from BEIS on recommendations by the Competition and Markets Authority (CMA) following its market study on statutory audit services. The CMA are proposing a number of changes to the way in which audits will be commissioned and undertaken in the future. The feedback that we have received accords with my own view that the various strands of Government and regulatory work on audit reform are not as well joined up as we might wish and there is a real risk of the wrong solution to the wrong problem.
We believe that the CMA recommendations should be viewed in the context of the findings of the other work currently being undertaken in the audit arena, and so this is not the appropriate time to implement their proposals.
As we said in our response, the recommendations in the report of the Kingman review of the Financial Reporting Council propose substantial changes to the operations of the regulator which will impact the statutory audit market. In addition, Sir Donald Brydon has been tasked with carrying out an independent review of the quality and effectiveness of audit. The Brydon review is wide-ranging and its recommendations may cover much of the same ground as the CMA Market Study. We therefore believe that the implementation of proposals resulting from the CMA Market Study should only be considered after the Brydon review has reported and its recommendations can be assessed together with those of the Kingman review and the CMA proposals to develop a joined up response to issues in the audit market.
Implementation of the CMA proposals in isolation risks a need to revisit some of the changes made in the light of the other reviews. In particular, we are concerned that the CMA has, not surprisingly, looked at the audit market through the lens of competition and their 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 will tend to increase competition in that market. However, they will not all necessarily improve the quality of audit which is, we believe, the more urgent task facing Government. In some cases, the recommendations risk reducing the quality of audit in the short term.
Our prescription for improvements in the audit market remains, as we have said in all our consultation responses on this subject, to focus on three principal issues:
Firstly, there must be clarification of the role of audit in order to reduce the huge perception gap that exists. The political, press and public expectation of the role of audit is very different from what an auditor would perceive it to be. The average man in the street might believe that the purpose of audit is to stop companies from going bust whereas auditors themselves might believe that their role is simply to check the accuracy of the historical information provided to them.
Secondly, much more training is required to foster a greater spirit of professional scepticism among auditors. Not only does the audit process not do what many in our society believe it should, it fails to do properly the bare minimum of what it is actually supposed to do. Politicians and other stakeholders question why the quality of accounting and auditing is not of the standard they expect. This is the delivery gap, rightly identified by the BEIS Committee, who argued that “the expectation gap must not be allowed to mask the serious failure of audit to deliver on its own current terms”.
Thirdly, there is the issue of a lack of trust in the ability of auditors outside the Big Four. The absence of confidence on the part of companies, investors and some regulators in the ability of smaller auditors to perform to the same standard 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.