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Is tech the remedy for audit reform?

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Whilst the impact of shared audits on audit quality is far from clear, both the Big Four and challengers issue their concerns. Dudley Gould argues the government must hasten the reform and focus on promoting innovation.

26th Aug 2021
VP of Business Development Circit
Columnist
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In response to government department BEIS publishing their consultation findings on proposed reforms, the Big Four have refused to adopt the shared audits proposal. Previously challenger firms had also issued their reservations, and the Brydon review claimed the proposal to be the “most controversial recommendation” from the CMA, with it being far from certain to improve audit quality.

This indicates that the concept of shared audits is unlikely to solve the problem of audit quality. Even if this proposal were to be introduced, it is unclear how much of an impact it would have on competition.

Instead, reforms should encourage smaller firms to incorporate technology to improve quality and streamline audit processes to drive down the cost of service delivery. There have been similar initiatives in other industries and given how quickly technology changes, and with reforms not due to be introduced until 2023, this should be given thought without delay. 

What is the government trying to achieve with shared audits?

Shared and joint audits are not new. Prior to the Big 4 being large enough to audit large groups completely, it was more common for firms to conduct audits together. However, 97% of the 350 largest listed companies in the UK are now exclusively audited by one of the Big Four.

Despite both having similar aims to increase competition, shared and joint audits are not the same. In joint audits, two firms take joint responsibility for the entire audit assignment. Comparatively, in shared audits, one firm takes overall responsibility for the audit opinion on consolidated group accounts, with a second firm completing specific components of the work. This could include taking on workflows split by group companies, divisions, or specific business areas. 

However, it is unclear whether the government is trying to move to a big six or big eight market, or whether they are attempting to strengthen a much larger number of mid-tier firms. 

Additionally, various mid-tier auditors I have spoken to over the last few months have fed back that they are unclear on what the government is trying to achieve.

No support for collaboration between firms

There doesn’t appear to be any support for splitting audits. The Brydon Report, an independent review to improve audit quality, was highly critical, with the paper detailing “negative comments” from stakeholders, alongside author Sir Donald Brydon questioning whether “joint audits [will] improve the quality of audit in anything but the long term, and even then with no certainty.”

Over the last few weeks, there has also been criticism from the Big Four, with EY, Deloitte, and PwC being opposed to the scheme. KPMG has offered to take part in a pilot but is sceptical whether this will lead to improving audit quality. 

Stephen Griggs, the managing partner at Deloitte, said shared audits “will present practical difficulties for challenger firms and companies [and] will act as a deterrent for UK listings and is unlikely to achieve its objectives.”

Challenger firms have also echoed these comments with BDO and Grant Thornton reportedly considering not pitching for shared audits for FTSE 100 companies.

Under the current proposal, it is also unclear which challenger firms would have the capacity to undertake shared audit work. If this only extends to Grant Thornton and BDO, it’s hard to see how this would open up competition to improve audit quality. 

Whilst it is not only unclear what the impact on audit quality would be, it would take considerable time to implement any change, with challengers and regulators needing to adapt.

Government must push technological audit solutions

Presently it is hard to see how challenger and smaller firms would have the resources to compete with the Big Four. However, the government should be more actively encouraging the adoption of audit technology in the reforms.

One way of achieving this should be for the government to focus on innovation and technology adoption within audit firms. This will allow smaller firms to take on the audits of larger clients by using tools to streamline and complete process-driven tasks. 

Innovation will improve audit quality as data analytics solutions are able to review complete data sets rather than just relying on sampling techniques. This allows tools to pinpoint areas of risk more accurately.

Audit quality requires innovation which in turn requires funding. The government has recently announced its Innovation Strategy and £14.9bn of spending on research and development. I’d like to see some of that targeted specifically towards audit.

Schemes like the government’s Help To Grow Digital, which give companies vouchers to adopt digital tools to improve their productivity, should be extended to the audit sector to encourage the take-up of new audit technology to enhance audit quality.

Additionally, another good example of encouraging innovation is Nesta’s Open Up Challenge, which provided up to £5m of funding to successful recipients for boosting adoption and innovation of open banking technology. 

There has been discussion about audit reforms for a number of years now, and the pace of technological innovation (such as the rise of a £2tn blockchain industry and even the UK potentially issuing their own digital currency) highlights the urgency of addressing this issue.

It is in everyone’s interest to improve audit quality as it is vital to give stakeholders confidence in the economy, especially as we emerge from the pandemic and adapt to a post-Brexit future.

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By chasmeehan
26th Aug 2021 12:45

In principle, shared audits offer an opportunity for large firms to act as aggregators and risk internalisers through governance ,quality assurance and secure platform providers for an ecosystem of smaller firms with spceialist expertise in particular industries or sectors. This would probably emerge first as a separate division of a large audit firm who would act as the contracting partner with large corporations and project manage the work of smaller firms - along the lines of the construction industry. It would pay off for the larger firms by reducing risk in highly specialised areas and for smaller firms by gaining wider market access. What is surprising is that it doesn't seem to have emerged in the US so far (except perhaps as a franchise model ?) It would be interesting to learn if there are similar developments elsewhere

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