Audit probe holds back from serious reform

Update: The Competition Commission concluded that the domination of Big Four accountancy firms has an adverse effect on competition in the market for listed company audits.

The long-awaited provisional findings into the audit market was released at 7am on Friday 22 February and concluded that the lack of effective competition encourages corporate auditors to focus more on the interests of the managers who appoint them than the shareholders they are supposed to serve.

"Essentially we identified two clusters of issues," audit investigation chairman Laura Carstensen told AccountingWEB. "The first was 'stickiness' and propensity of companies not to switch auditors and adverse issues that can result. And the second was to make sure auditors are more squarely aligned with what shareholders want." [Register and log in to see further comments from Carstensen in the full version of this article.]

Recommended remedies

1. Mandatory tendering
2. Mandatory rotation of audit firm
3. Expanded remit and/or more frequent audit quality reviews
4. Prohibit ‘Big Four only’ clauses in loan documentation
5. Strengthen accountability to the audit committee 
6. Better shareholder-auditor engagement; and
7. Extended reporting requirements.

Source: Competition Commission remedy notice

The latest report is a major milestone in a 16-month probe that was set in train by a critical report from the House of Lords economic affairs committee in 2011. 

After poring over research documents, surveys and evidence from its own enquiries, the investigation team concluded that Big Four firms hold most of the big company audits, and that these organisations rarely change auditors.

These factors constitute an adverse effect on competition for listed company audit work, resulting in in higher prices, lower quality and less innovation and differentiation than would be the case in a more open market.

The lack of competition creates a risk of auditors being insufficiently independent from executives and insufficiently sceptical of their attempts to present the accounts in the best possible light.

Interested parties have until 21 March to submit their comments and alternative suggestions to the investigation. These responses will be collected and digested over the summer, with the final deadline for deciding any statutory action set for October 2013.

Continued...

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Comments
Steve-EBL's picture

Audit Lottery System

Steve-EBL | | Permalink

I think stakeholders will benefit from some increased objectivity whilst auditing large companies financial statements.

Some massive companies globally have gone unexpectedly bust over the last decade or so, overseen by esteemed auditors, so there is no doubt there is a problem.

We are all stakeholders, whether it be with ensuring they pay the correct amount of corporation tax (fake provisions and accruals are rife), or for example if the man on the street is investing either directly or through pension schemes.  Of course employees, if the directors are being wreckless, they need replacing and not surviving by tweeking the books until its too late.

I think a firm of qualified accountants that has competence and resources to fulfil an audit should once approved, join my proposed audit lottery scheme idea, a bit like ERNIE (new acronym meaning pending) they would be randomly assigned to a 3 year engagement; dependant (a bit like a dating website) on meeting clients specified key requirements, and perhaps even stating if a menage a trois would be considered. 

If generally all audit firms are competent, and all auditors are members of ICAEW and such, what has anyone got to hide (except their wealth).

John Stokdyk's picture

ICAEW: 'Don't undermine audit'

John Stokdyk | | Permalink

ICAEW chief executive Michael Izza released the following statement on the morning the Competition Commission provisional findings were published:

“This report, in reinforcing the importance of audit to maintaining confidence in capital markets, is a timely reminder that it can only be effective if wider shareholders as well as investors and management engage effectively with the auditors.

“Whilst the Competition Commission has found no evidence of anti-competitive behaviour amongst the Big 4 firms, it has identified a number of areas where more can be done to increase competition and choice in the audit market for the UK’s largest companies.

“It is important to see this report in context. The UK audit and accounting sector is a significant success story which not only contributes over 1% of GDP in its own right but helps support businesses of all sizes across every economic sector driving employment and growth.  The accountancy profession is also the biggest single employer of graduates in the UK and a great British export.  

“It is therefore critical when looking at how these measures are implemented, that they do not undermine or destabilise what is such an important sector for the UK economy. They also need to be seen in an international context and be consistent with proposals currently being considered in Europe. 

“Increasing market choice will only be possible if audit committees - who are responsible for appointing auditors - recognise that there is huge quality and talent to be had outside the big 4 accounting firms.”

Hmm...

WhichTyler | | Permalink

“Increasing market choice will only be possible if audit committees - who are responsible for appointing auditors - recognise that there is huge quality and talent to be had outside the big 4 accounting firms"

And 60% of audit ctee chairs were from Big 4 firms...

carnmores's picture

its called a cartel

carnmores | | Permalink

and with good reason - we need to find ways to ways to examine the role of audit in a modern economy - sending out young people with very little training and ask them to fill in what is effectively a manual is not a sound process. fast growing and or high risk companies, as identified, need to be subject to more rigorous scrutiny - here is an overwhelming need for independent audit panels

carnmores's picture

PS

carnmores | | Permalink

is Izza the most frequent self justifier there is?

Aduit rotation

N.Krishnaswamy | | Permalink

 

 

 

The best way out to require

N.Krishnaswamy | | Permalink

The best way out to require audit by joint auditors, the  nubmer of joint auditors being decided  depending on the size of capital or turnover or gegraphical access so that branch audits are always done bya different auditor thatn the mainstatutoryauditors. This will creat more widespread exposure to all sizes of firms foir audit expericence and to grow  intheir exoertise. In India for all public sector companies, the auditor general suggests the auditor  for units of each area and mnostly local audit firms so that expenses on travel and other outgos are reduced. In the case of public sector banks, threeto five audit firms are appointed as statutory adutors and the aduits of branachs are alllotted to the local auditor firs os certain size depening on the size of the  advances of the branches. The statutory auditors divided maong themselves the varius areas of audit and discussmaong themseles and the management collectively onaudit points arising out ofthe audit before finalised the aduit and the audit report with various notes and qualifications are issued as reqruied under the regulations of the central bank. It is working well for th epast more than fifty years now. Whynot adot the same in UK also?