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CMA joins calls to split audit and consultancy

18 April 2019

The UK Competition & Markets Authority (CMA) says legislation is now needed to address both the lack of choice and competition in the audit market.

There is also genuine concern about the vulnerability of the industry to the loss of one of the Big 4.

The CMA is recommending the separation of audit from consulting services, mandatory ‘joint audit’ to enable firms outside the Big 4 to develop the capacity needed to review the UK’s biggest companies, and the introduction of statutory regulatory powers to increase accountability of company audit committees.

CMA chairman, Andrew Tyrie, said too many audits fall short, with more than a quarter of big company audits considered sub-standard by the regulator. “This cannot be allowed to continue,” he stressed.

He went on: “The government now has three reports to hand. In large part, they come to similar conclusions. Conflicts of interest cannot be allowed to persist; nor can the UK afford to rely on only 4 firms to audit Britain’s biggest companies any longer. Early action will require legislation – hence the CMA’s proposals.”

The CMA recommendations are:

*Operational split: Auditors should focus exclusively on producing the most challenging and objective auditors, rather than being influenced by their much larger consultancy businesses. Given the difficulties with an immediate global structural split. At this stage the CMA is only recommending an operational split of the Big 4’s UK audit work. This will require separate management, accounts and remuneration, a separate CEO and board for the audit arm, separate financial statements for the audit practice, an end to profit-sharing between audit and consultancy, and promotions and bonuses based on the quality of the audits.

*Mandatory joint audits: More choice and competition for audits of big businesses can and should drive up their quality, but the barriers to entry for ‘challenger’ audit firms are currently large. The CMA is recommending mandatory joint audits to help increase capacity at the challenger firms, choice in the market and thereby drive up audit quality. It believes challenger firms should work alongside the Big 4 in these joint audits and jointly liable for the results! There may be initial limited exceptions to the requirement, based on criteria set by the regulator, focused on the largest and most complex companies. However, any company choosing a sole ‘challenger’ auditor should be exempt, says the CMA. It is envisaged that the joint audit requirement should remain in place until the regulator deems that choice and competition have improved enough to address the vulnerability of the market to the loss of one of the Big 4.

*Audit committees: The CMA says it is essential that audit committees choose auditors by seeking those likely to provide the most robust and constructive challenge to the accountancy practices of their companies. That means the regulator should hold audit committees more vigorously to account. This may include ensuring that committees report their decisions as they hire and supervise auditors, and that the regulator issues public reprimands to companies whose committees fall short of adequate scrutiny of their auditors.

*Five year review: The regulator should review the effects of these changes periodically, in the first instance in five years from the full implementation date. It is then that they should look to see whether to go beyond the operational split already proposed, and how to fine-tune the joint audit remedy to adapt to market developments.

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