A number of leading UK firms have come out in support of the introduction of a cap on the number of listed clients a firm can audit in their responses to the Competition and Market Authority’s (CMA) review into the UK audit market.

While the cap proved a popular concept, many also warned that actually establishing such caps would prove difficult.

Following a number of high profile scandals which plagued the UK audit market over the last year, several Members of Parliament called upon the CMA to launch a review into the lack of competition between audit firms in the FTSE 350 market.

In April, CMA chair Andrew Tyrie described the Big Four as an ‘oligopoly’ and that the lack of competition within the audit market was something which needed to be looked into.

During the summer, the Big Four and other leading firms acknowledged it was almost inevitable that the CMA would launch a review. In response, they held closed-door meetings with the Institute of Chartered Accountants in England and Wales (ICEAW) to develop a range of proposals which would help improve competition in the listed market.

The CMA launched its review in October and requested comment from various stake holders surrounding a range of questions about possible methods of audit reform to increase competition within the market.

One of the suggestions which has gathered support from across a range of firms was the possibility of a temporary market cap. The argument for introducing such a cap is that it would mean some listed companies would have to look outside of the Big Four for audit services.

The hope is this would decrease what has been described as bias from the demand side of audit selection in preference of the Big Four Firms, increasing the chances of mid-tier firms successfully tendoring for audit contracts.

In its response to the CMA review, Deloitte said: “On balance we believe that market share caps, if introduced for a set period of time and judiciously planned and monitored, are the only effective mechanism for moving ‘from four to more’, within an acceptable timescale.”

BDO also supported this proposal suggesting that it would provide a platform for mid-tier firms to build capability in the longer term.

Most firms which expressed support for the introduction of some form of market cap also noted that it could create different problems within the market. A number suggested a cap could make it difficult for audit committees to choose a suitable auditor.

KPMG, for example, noted: “A direct consequence of imposing formal market share caps is that this would restrict Audit Committees (AC) choice of auditor, when the market share cap for a particular audit firm (or audit firms) has been reached. In some cases, ACs might in practice be “forced” to appoint a particular audit firm even when they would not have chosen this option due to

concerns over quality.”

It added that it was its understanding that this could prove to be a ‘significant’ issue for companies.

Grant Thornton also expressed scepticism about a potential market cap. The firm suggested that the introduction of market caps as a sole solution would not work as it would allow for the Big Four to ‘cherry pick’ the most attractive and profitable audit contracts.

However, Grant Thornton also commented that a successful outcome of the CMA review would be if 10–20% of FTSE 350 companies are audited by non-Big Four firms within 3-4 years.

In its response, Grant Thornton reiterated its proposal of creating an independent audit appointment body to allocate auditors to companies. The firm suggested this would also help with reducing the chances of conflicts of interest.

Shared vs joint audits

Another proposal which was supported by a number of firms is the introduction of shared audits. Deloitte said it would support ‘shared audits, where the four largest firms would partner with a firm outside this group to audit a particular component but retain overall responsibility for signing off the group accounts’.

Many firms backed the view that it would allow for mid-tier firms to gain experience and expertise in auditing large and complex companies in a relatively safe manner.

While there was support from a lot of firms for shared audits, the majority did not support joint audits. One of the reasons for this is the potential extra cost for companies to employ an extra auditor.

However, Mazars supported the idea of joint audits (alongside market caps) citing that it would improve the quality of audits. The firm also noted that it would make the transition between auditors easier.

Big Four support

There was support from the Big Four about the idea of sharing technology platforms, particularly in the context of a shared audit.

PwC, for example, noted it would be ‘open’ to the idea of direct support given from the Big four to mid-tier firms on the condition that they were designed to ‘enhance – and not undermine – competition’.

KPMG suggested that the Big Four could provide support by licensing their software to the mid-tier firms to help them with more complex audits. Crowe noted that one of the barriers for mid-tier firms to enter the FTSE 350 audit market is the lack of ability to invest the same level of money as the Big Four into technology.

What seemed to be unanimously clear from the responses was that breaking up firms into audit and non-audit would not be a beneficial solution. One of the main reasons for this being that it would increase audit fees for companies and that firms relied on the multi-disciplinary nature of their business models.