The Competition and Markets Authority (CMA) has published its final report with recommendations to address serious competition problems in the UK audit industry.
Legislation is needed to address both the vulnerability of the industry to the loss of one of the Big 4, and the current inadequate choice and competition. The CMA is recommending the separation of audit from consulting services, mandatory ‘joint audit’ to enable firms outside the Big 4 to develop the capacity needed to review the UK’s biggest companies, and the introduction of statutory regulatory powers to increase accountability of companies’ audit committees.
The CMA’s recommendations follow extensive discussions with audit firms, investors and major UK companies on its Update Paper – published in December. They also take account of the recommendations of a major report from the Business Select Committee, and the inquiry into regulation led by Sir John Kingman. The recommendations are:
CMA Chairman Andrew Tyrie said “People’s livelihoods, savings and pensions all depend on the auditors’ job being done to a high standard. But too many fall short – more than a quarter of big company audits are considered sub-standard by the regulator. This cannot be allowed to continue.
“The Government now has three reports to hand. In large part, they come to similar conclusions. Conflicts of interest cannot be allowed to persist; nor can the UK afford to rely on only four firms to audit Britain’s biggest companies any longer. Early action will require legislation – hence the CMA’s proposals.”
CMA’s Chief Executive, Andrea Coscelli, said “The UK is recognised as having a strong history in the fields of corporate governance and accounting.
“Our recommendations, along with improvements to regulation and clarifying the purpose and scope of audits, will ensure the UK strengthens its position.”
“We look forward to supporting the Government as it considers how best to take forward these changes through legislation, alongside Sir John Kingman’s recommendations on regulation and the results from Sir Donald Brydon’s review on the quality and effectiveness of audit.”
Chair of the Business, Energy and Industrial Strategy Committee, Rachel Reeves MP, said “We welcome the CMA’s recommendations aimed at addressing what are serious failings in the audit market and ending the stranglehold of the Big 4. We agree that it is high time that their audit work is separated out from their consultancy services to tackle the conflicts of interest that have persisted for too long.”
“The CMA’s proposals, when taken with our Committee’s other recommendations such as seven-year, non-renewable audit terms and cooling off period for non-audit services, should go some way towards putting things right.”
“These findings, seen alongside our Committee’s report and the results of the Kingman review, show there is a clear consensus on how to restore confidence in the market. It’s now up to the Government to deliver, by coming forward with legislation to ensure that audits provide what businesses, investors, employees, pension-holders and the public expect.”