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UK Seeking To Encourage Audit Market Competition

Friday, November 23, 2018

Companies looking for auditing services may benefit from a more competitive market if changes are recommended as part of a recently launched Competition and Markets Authority (CMA) review into the industry.

The CMA's detailed study of the audit sector is intended to examine concerns that it is not working well for the economy or investors.

As part of its review, the CMA will investigate whether the sector is competitive and resilient enough to maintain high quality standards. The move comes amid growing concerns about statutory audits, in particular following the collapse of construction firm Carillion and the criticism of those charged with reviewing the organization's books, as well as recent poor results from reviews of audit quality.

The review was launched in October, with feedback sought from stakeholders. Consultation responses to the review have newly been released. The Authority is now moving forward with developing recommendations for UK lawmakers to consider.

Launching the review, CMA Chairman Andrew Tyrie said: "If the many critics of the audit process are right, it is not just the companies which buy audits that lose out; it is the millions of people dependent on savings, pension funds and other investments in those companies whose audits may be defective."

The study will look at:

  • Choice and switching. According to the CMA, changes put in place by the Competition Commission appear to have strengthened competition between the big four firms – Deloitte, KPMG, EY, and PwC – but the largest UK companies when seeking auditors still turn almost exclusively to one of these firms when selecting an auditor to review their books.
  • Resilience. The market study will examine what the role of the big four firms means for resilience – in particular that, according to the CMA, each of the big four auditors is "too big to fail," potentially threatening long-term competition.
  • Incentives. Companies, rather than their investors, pick their own auditor. The CMA's work will examine concerns that this might result in a lack of incentive to produce challenging performance reviews that may improve audit quality.

The CMA said if it finds evidence that the market is not working well after examining these areas, it will scrutinize all proposals for tackling the issue.

Recommendations will focus on: ideas to improve incentives; further separating audit and non-audit services; and reducing barriers to entry and expansion of non-Big Four firms. According to the CMA, this could result in a more competitive market for the benefit of firms seeking auditing services and their investors.

Alongside the launch of the review, a consultation was launched, with responses welcomed until October 30, 2018. On November 20, 2018, responses to the consultation were released, with feedback having been received from firms, industry stakeholders, and members of the public.

The CMA has said, following the consultation, it intends to complete its work as soon as possible. As part of this, the CMA will take into account the views from stakeholders, including the sector regulator, the Financial Reporting Council. A legislative response, if deemed appropriate, would be adopted by October 2019 at the latest.