The UK’s Competition and Markets Authority (CMA) has released its final report into the UK audit market, calling for an operational split of the Big Four and mandatory joint audits.
Following an update paper it published in December 2018, these two proposals were mostly criticised by the Big Four and a number of mid-tier firms. Despite the criticism, the CMA has defended these options by saying they will increase competition in the market and make it less vulnerable to a potential collapse of one of the Big Four firm in the manner of Arthur Anderson.
EY was the most critical of the report. It said that the CMA’s proposals ‘risk the UK’s attractiveness for business’ and described them as a ‘missed opportunity’ to create lasting change and make the UK the best and safest place to invest and work.
A spokesperson for EY said: “We were surprised that the CMA has recommended mandatory Joint Audits, given the level of opposition from companies in their submissions to the market study and the lack of evidence internationally that this measure would improve audit quality or auditor choice. We look forward to understanding the basis of this recommendation and seeing the supporting analysis.
“We fundamentally disagree with the CMA’s proposal for an operational split of the Big Four. We believe this would undermine audit quality by reducing our ability to draw on critical skills, capabilities and investment and diminish the resilience of the audit business. Evidence supports the benefits of a multidisciplinary model to delivering quality audits.
“At a time when the Financial Reporting Council (FRC) is reviewing corporate reporting and the Brydon Review may change the scope of audit, it appears ill-timed for the CMA to restrict the skills needed to deliver high quality audit now and in the future.”
The multidisciplinary model has long been defended by the Big Four despite a number of reviews calling for some degree of separation. At the start of April the Business, Energy and Industrial Strategy select committee published its report on the future of audit which called for a legal and structural split of the Big Four.
However, KPMG appeared to be more open to an operational split. A spokesperson said: “We welcome many aspects of the CMA’s recommendation to introduce increased separation. This model should still ensure our auditors have access to the benefits a multi-disciplinary firm brings, such as talent, technology and global capability.
“We have already begun working on the introduction of some of the measures the CMA recommends in this area, including new performance management rules for our auditors, within which audit quality is the primary objective, a ban on providing non-audit services to FTSE350 companies we audit and separate governance over aspects of our audit practice.”
Commenting on mandatory joint audits, they said: “Joint audits may offer an avenue for some of the smaller audit firms to enter the market, however, success relies on their capability and willingness to do so. Introducing mandatory joint auditing to the FTSE will require these firms to very quickly be ready to deliver multiple, large-scale, complex global audit work within a very short time frame, if audit quality is not to be jeopardised.
“Shareholders, audit committees and the regulator must have total confidence in the ability of these firms to complete this work before the market can move ahead with this recommendation. We agree with the CMA’s recommendation that the largest and most complex companies should be exempt should these measures be taken forward.”
Deloitte UK managing partner for audit Stephen Griggs said: “We will review their report to understand the details of how the measures will be implemented.
“However, we are concerned that some of their headline recommendations don’t meet the objectives on increased choice and competition and that our warnings on unintended consequences such as lower audit quality, damage to UK competitiveness, and weaker resilience of the sector have been ignored.”
A PwC spokesperson stressed the importance of the Brydon Review, which is focussing on whether auditing standards are still fit for purpose for 21st business models and the so-called expectations gap. They said: “The ongoing Brydon Review is a key cornerstone of efforts to make audit fit for the future with quality at its heart.
“Our own Future of Audit consultations with investors, businesses and academics reveal strong appetite to discuss the future of audit and a wide range of opinions. These views include a desire for audits to be more forward looking and broader in scope to cover other areas of reporting beyond historical financial statements."