The department of business, energy and industrial strategy’s (BEIS) select committee has officially launched a new inquiry into the future of audit.
Rachel Reeves, the chair of the BEIS select committee, announced the inquiry during a keynote at the ICAEW’s London HQ.
The committee will call on all major stakeholders in the audit sector -- including the Big Four, accounting bodies, the FRC, and CFOs -- to give evidence in January next year. The start date in the New Year is to allow the CMA market study and the review of the FRC (by Sir John Kingman) to conclude.
In a statement, the BEIS committee said it intends to begin “as soon as possible after the Kingman and initial CMA reports are published” and wants “to feed into the CMA study and ensure audit reform is linked to coherent reform of the wider corporate governance agenda”.
Reeves has been a fierce critic of the audit market in recent times and her ICAEW speech did not temper her rhetoric at all. She bluntly labelled the audit market as “broken”.
She added, “Misleading audits have been at the heart of corporate failures over recent decades. Recent accounting scandals at BHS, Carillion, and at Patisserie Valerie have shown accounts bearing closer resemblance to works of fiction than an accurate reflection of the true financial performance of the business. Repeated accounting failures have contributed to the collapse of major businesses and undermined public and investor confidence.”
The BEIS inquiry will add another chapter to what has been a harrowing few years for the audit sector. The Big Four, in particular, has been blasted from pretty much every corner. Indeed, criticising the Big Four has become a rare beacon of cross-political party agreement.
As criticism has swirled, the idea of breaking up the Big Four’s audit oligopoly has gained steam. Labour and John McDonnell are exponents of the idea and even the FRC’s head Stephen Haddrill has endorsed the proposal.
This is precisely what the CMA report on audit market competition is looking into. The other part of the ongoing investigation into the audit market is the Kingman Report, which is investigating the FRC’s seeming inability to effectively regulate the audit market. The watchdog has been slammed for being too content with "apportioning blame once disaster has struck" rather than proactively challenging companies.
The Committee’s inquiry will take the lead from these two reports, and it is inviting evidence on the following questions on the future of audit:
What is the relationship between competition and quality in the audit market? How should reforms in one area complement the other?
Do you agree with the CMA proposals (when published)? Will the remedies proposed be likely to increase quality and trust in audits? Are there any potential unintended consequences?
Do you agree with the Kingman proposals regarding the FRC (when published)?
To what extent do conflicts of interest undermine trust in audit? How best can they be removed or mitigated?
How important to the quality of audit is the relationship between auditor and audited company? How can we ensure that there is the right level of challenge? What role should shareholders have in ensuring high quality audits?
Are the proposed reforms of audit consistent with other recent reforms of corporate governance? Are there any other consequential reforms required?
As part of this inquiry, the Committee will consider the published submissions from the CMA’s market study of the audit sector. Existing submissions to the independent review of the FRC, conducted by John Kingman, are welcome, alongside further responses to the questions above.
The deadline for written submissions is Friday 11 January. You can submit evidence here.