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CMA launches immediate review of audit sector

09 October 2018

The Competition and Markets Authority has launched a major review of the audit market, amid growing criticism following the collapse of construction firm Carillion and recent poor results from the FRC’s review of audit quality.

CMA chairman, Andrew Tyrie said: “If the many critics of the audit process are right, it is not just companies which buy audits that lose out; it is the millions of people dependent on savings, pension funds and other investments in those companies whose audits may be defective.

Tyrie felt that Sir John Kingsman’s independent review of the regulator is a big step in the right direction. And the CMA will now examine the market carefully to establish what contribution more effective competition could make to improving audit quality.

The CMA’s market study will examine 3 main areas:

- Choice and switching. Changes put in place by the Competition Commission appear to have strengthened competition between the Big 4 firms, but the largest UK companies still turn almost exclusively to one of them when selecting an auditor to review their books.

- Resilience. The market study will examine what role the Big 4 firms means for resilience – the risk being that each of the Big 4 auditors is “too big to fail”, potentially threatening long-term competition.

- Incentives. Companies, rather than their investors, pick their own auditors. The CMA’s work will examine concerns that this might result in a lack of incentive to produce challenging performance reviews.

CMA said that if it finds evidence that the marker is not working well after examining these areas, it will put forward proposals for tackling them.

An FRC spokesperson said: “We have expressed concern about concentration at the top of the audit market so we welcome this announcement.”

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