The Business, Energy and Industrial Strategy (BEIS) Committee’s future of audit inquiry has kicked up more questions than answers, as MPs and various stakeholders seem at a loss to salvage a broken industry.
“Is the FRC off the rails, yes. Is the solution a new body, probably. Will it work? Probably not.” That quote by Professor Karthik Ramanna just about sums up the future of audit inquiry run by the BEIS committee. The session featured MPs throwing out suggestions and a panel of experts effectively shrugging their shoulders.
Asked about the vaunted CMA review into whether the audit sector is competitive and resilient enough to maintain high quality standards, Ramanna was equally dismissive. “The CMA review can’t address [the problems with audit] because they were focused on competition,” said Ramanna, a professor of business and public policy at Oxford. “You can have 50 auditors and still not have competition, if the conditions aren’t right.”
Ramanna’s opinion was supported by Chris Humphrey, a professor of accounting at the Alliance Manchester Business School. “If you’re concerned about the commercialism in accounting profession, it’s a contradiction that you think the solution lies in greater competition,” said Humphrey.
“You have to consider audit within the wider corporate governance arena. There’s an enormous amount of activity going on, and I think it’s vital that you pull back to some sort of conceptual analysis.”
MPs gamely displayed their ideas, from market capping to joint audits, but no suggestion was met with resounding enthusiasm. The idea of joint audits -- whereby two or more auditors produce and share the responsibility for the audit -- was poorly received, in particular.
“There’s been research that joint audits could hinder independence,” said Vinita Mithani, an accounting lecturer at Middlesex University. “Because you have two audit firms jostling for management’s favour that could increase ‘opinion shopping’.”
Ilias Basioudis, senior lecturer of financial accounting and auditing at Aston Business School, was similarly dismissive of joint audits, stating that they had been tried in France and failed to deliver on their aims. Basioudis went further, arguing that “non Big Four firms don’t have the experience, the staff, the expertise” required to handle FTSE 100 audits.”
Basioudis remarked that “there’s no evidence” of the independence of audit being jeopardised by auditors providing non-audit services. “But [a separation between the two] would help with the public perception,” he said.
However, he added that such a separation might have the unintended consequence of a Big Four firm dropping the audit market because non-audit work is more lucrative.
Oxford’s Ramanna agreed on the effectiveness of a Chinese wall approach, separating audit and non-audit services. “We tried the approach before in investment firms. We’ve seen that movie before and it doesn’t really end how we think,” he said. “And then there’s the fact that audit is a global industry. The UK doesn’t have much leverage, but you could be part of the vanguard.”
Today’s hearing was the first in a series of planned sessions. The committee inquiry is likely to call witnesses from the Big Four and ‘challenger’ accountancy firms, Audit Committee chairs, CFOs from FTSE350 companies, institutional investors, as well as representatives from the FRC & the ICAEW, outside experts and Sir John Kingman.