Mon, Jan 14, 2019

Duff & Phelps Welcomes CMA Report into Improving Competition in the Audit Market

“Robust reform” required to address problems identified in the sector.

Fundamental change to the UK audit sector as a result of the review conducted by the Competition and Markets Authority (CMA), is a welcome reform that will not only encourage competition but bring confidence back to the audit process.

The CMA recently launched a market survey into audit quality following the collapse of Carillion, identifying a number of reasons why the audit process failed. The survey highlighted that the choice of audit partners was too limited, with the Big Four conducting 97% of the audits of the UK’s largest firms. Further, the CMA felt that the auditors’ focus on quality appears diluted by the fact that at least 75% of the Big Four’s revenue comes from other services like consulting.

Paul Clark, Managing Director, Duff & Phelps, stated: “The CMA report is clear. It is proposing changes to legislation to introduce a range of new measures to separate the audit function from other consultancy services. In addition, it is introducing measures to increase the accountability of audit committees as well as imposing a new joint audit regime giving firms outside the Big Four a new role in auditing many of the UK’s leading companies.”

The key recommendations of the report include:

  • A split between audit and advisory business
  • Regular scrutiny of auditor appointments and management
  • A new "joint audit" system, with Big Four and non-Big Four firms working together 

Clark continued: “The CMA itself has called for “robust reform” and recognizes that this may take some time. But it has also said that if these reforms do not go far enough then it will “persist until the problems are addressed.” Competition in this market is weak as many of the UK’s largest companies have limited choice, given that one or more of the Big Four may be conflicted.

“We are pleased to see that the CMA is proposing that the audit process of the FTSE 350 companies should be carried out by at least two firms, with one firm being outside the Big Four. This will give many mid-tier firms access to the market, allowing them to bring independent advice, while instilling client confidence as a result of a process that is designed to cross-check quality.” continued Clark.

The CMA is now opening its proposals to public consultation until January 21, 2019.

 


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