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Shared audit costs spiral as projections for new system top £1bn

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The government’s plan to force shared audits on the largest UK companies may cost businesses five times more than officials first predicted, as opposition to the proposals grows.

22nd Nov 2022
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Businesses will have to pay more than originally expected to appoint two auditors under new government proposals designed to improve standards in financial reporting.

The joint audit scheme aims to break the Big Four stranglehold at the top end of the audit market by forcing large listed businesses to appoint a second, smaller auditor to carry out at least 30% of the work.

According to official figures obtained by the Financial Times, the cost to business has risen to more than £1bn over 10 years, a fivefold increase on prior government estimates.

As part of a public consultation last year, the price of the “managed shared audit” was £210m, but the costs have spiked sharply following more scoping work by officials.

Data from the impact assessment carried out estimates the costs of splitting the work of auditing a FTSE 350 business will include some amount of duplication of work; the challenger firms themselves charging more as they increase capacity; regulatory fees rising in anticipation of a greater pipeline; and increased legal costs requiring larger reserves.

The extra costs of about £100m a year are about 8% of the aggregate audit fees paid by the FTSE 350 last year, according to research by data provider Audit Analytics.

A government spokesperson said shared audits continue to be the favoured approach to reforming the market, but would not comment on the inflated costs of the new system.

EY, Deloitte, KPMG and PwC currently audit 99% of the FTSE 100 and around 87% of the FTSE 250.

Overall, the quartet had 83.1% of the market share for the major UK indices in 2021.  Outside the Big Four, BDO is the leading auditing firm with an 8.7% share of the market in 2021. Grant Thornton dropped to 3%, while the remainder were audited by eight firms, with 1% or less of the market share held by each.

The government wants more audit firms to take on the responsibility of checking the finances of the largest companies, and to have plans in place should a Big Four firm fail or dissolve.

Opposition rising

Auditors themselves have been split on the proposals. Deloitte, EY and PwC have gone on record to voice their opposition, while KPMG has said the system is unlikely to work in practice.

BDO and Grant Thornton, in theory the two largest beneficiaries of the new system, have said they would prefer to win more FTSE 250 audits on a solo basis than to participate in a large number of shared audits.

Industry watchers have also expressed concern that there is little compelling evidence shared audits would improve conditions for any party.

 

The Institute of Chartered Accountants in England and Wales (ICAEW) said challenger firms first need to gain the confidence of investors who have put pressure on listed companies to choose Big Four firms.

It has also flagged the Catch-22 situation where challenger firms can’t demonstrate their qualities to bid for larger engagements without first having gained that experience – something shared audits could impact on.

Reaction to the £1bn figure from inside regulatory circles is also negative, the Financial Times reports. The Financial Reporting Council (FRC) is expected to push back and challenge the inflated numbers, the publication said.

Concerns grow over policy drift

The shared audit plans were part of a sprawling multi-year government effort to revamp the entire sector by boosting competition and standards following years of scandal and corporate failures.

However, in recent months, many of the original ideas to strengthen governance and standards have been watered down by a succession of ministers.

A proposed rewrite of boardroom rules drawn up in the wake of major corporate collapses including government outsourcer Carillion, retail giant BHS and cafe chain Patisserie Valerie has been shelved. And earlier this year, ministers also dropped plans that would require directors to sign off on internal financial controls, in line with the US Sarbanes-Oxley Act that was introduced following the fall of Enron.

Two weeks ago, the Chartered Institute of Internal Auditors (Chartered IIA) sent letters to senior government officials urging them to speed up the reforms amid concerns turbulence to the economy and in Westminster was causing “vital” changes to drift.                                                                  

The letters, addressed to Prime Minister Rishi Sunak, Chancellor Jeremy Hunt and Business Secretary Grant Shapps, state that the UK is feeling an increasingly “critical need for audit reform” as it enters a period of economic volatility.

“We would argue that the recent economic turbulence has further increased the urgency for audit and corporate governance reform,” the CIIA’s letters said. “This would help form the framework to support the long-term performance of business, increase investment, and enhance the overall strength of the economy.

A series of letters written by Chartered IIA chief executive John Wood requested that Shapps and the Department for Business, Energy & Industrial Strategy (BEIS) publish a “clear timeframe” for the Audit Reform Bill’s entry into law.

“The new business secretary must publish the draft Audit Reform Bill without delay, along with the statutory instruments needed to make audit and assurance policies and resilience statements a new requirement,” Wood said in a statement. “To maintain Britain’s position as a global leader in first-class corporate governance … the government must get on with audit reform.”

Two government officials, Baroness Natalie Bennet and Darren Jones, MP for Bristol North West and chair of the BEIS Select Committee, have also tabled new parliamentary questions requesting a detailed update on audit reform by the new government.

Replies (9)

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By JustAnotherUser
22nd Nov 2022 15:28

These audits would cost a lot less if they didn't factor in future 'fine' payments and penalties into the total cost ;)

Thanks (2)
Ivor Windybottom
By Ivor Windybottom
22nd Nov 2022 16:42

Has anyone thought where a whole new layer of audit staff are going to come from?

Auditors are hard enough to recruit as things stand today, so adding another level of audit is only going to make recruitment harder.

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Danny Kent
By Viciuno
23rd Nov 2022 09:30

Surely its obvious that auditing in it's current guise is no longer sustainable.

Cost should come secondary, either do the job properly or don't bother.

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By Paul Crowley
23rd Nov 2022 13:58

Who would have thought it?
Those putting their name on the line need to do indepth review or rework the others' work in the process.
Shared audits just increases costs with zero extra assurance

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By Michael Cope
24th Nov 2022 10:22

Are large companies audtiable or is it just box ticking by the big four to satisfy their institutes and do auditors really understand their clients

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By 2TunTed
24th Nov 2022 10:31

A shared audit just clouds who is responsible for what so lots more complexity in sorting things out they inevitably go wrong but at least there will be be two PII policies in play. Great for the lawyers but otherwise no change.

We seem to be slipping into a 'Cops and Robbers' mentality - the company management try to get away with as much as possible and the auditors are supposed to find the nefarious activity, report it and then persuade 'the perps' to pay for it. Obviously a ridiculous system.

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By unclejoe
24th Nov 2022 11:02

A ridiculous idea that won't improve audits. If the government want to improve things there are two simple things it could do: a) give regulatory bodies such as FCA real teeth to investigate and prosecute when matters are brought to their attention, and b) go after the people that perpetrate and collude in misreporting, fraud, etc rather that the company or audit firm with real sanctions and penalties, prohibiting the company from paying the individuals fines etc.

I once worked in a company that brought in a "four eyes" policy to reduce mistakes. Everything done should be checked by someone else. It made matters worse - the person preparing the work got careless assuming that any mistake would be picked up by the checker, the checker didn't bother assuming that it had been done right. Make people accountable and then hold them to account.

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By AndrewV12
24th Nov 2022 11:17

Its not idea and its quite a burden on business, but the current system was unfit for purpose.

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By tedbuck
24th Nov 2022 12:30

You have to think that there are no brains in the heads of those who draw up these schemes.

The current systems of auditing aren't capable of dealing with the computer based records of major companies. Putting two lots of box tickers on the job won't help although it might disapply the 'well there's a lot of extra work with this company' syndrome.

We really need the Powers that be to start to think laterally. Surely they could learn from events. Many of the recent collapses occurred because of an internal report bounding into the open. Light bulb moment! Auditors need someone on the inside. Lead balloon job I should think but nothing else has worked.

An audit is basically a waste of money if it finds nothing as is usually the case so why not accept that and look for a new approach to the problem. The regulators make a huge fuss over the ticking of boxes but it makes no difference if nothing is found because the box tickers are just looking at the boxes rather than at what is really going on.

We've all seen it - problems being shoved under the carpet so as not to rock the boat. (There have been a few fines over it recently I seem to recall) but no-one will admit that the system is broken and no longer works. Too many vested interests I suppose and all those fines - "Goody, goody" say the Regulators - "It distracts attention from us."

O Brave new world .......

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