The Local Authority Pension Fund Forum (LAPFF) has welcomed proposals from the Competition and Markets Authority calling for a radical reform of the UK market for audit services.
In a report published on Thursday, the competition watchdog said the so-called Big Four firms should be forced to spin off their audit work from their separate consultancy businesses.
The competition watchdog also wants to open up the market to new entrants and improve competition by requiring the main audit players to work with smaller rivals to product joint audit reports.
Acting LAPFF chair Paul Doughty, who also chairs the £8.6bn (€10bn) Merseyside Pension Fund, said: “We welcome the recommendations of the CMA. LAPFF has been impressed by the thoroughness and independence of the CMA’s work in the face of tremendous lobbying by the accounting industry.
“Where we see resistance to the proposals from the accounting industry to the recommendations of the CMA we deduce that is because they fear they will be effective.”
“More than a quarter of big company audits are considered sub-standard by the regulator. This cannot be allowed to continue.”
Andrew Tyrie, chair of the CMA
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 CMA launched its inquiry into the UK audit market in October last year after months of public and political disquiet over the failure of companies such as outsourcing conglomerate Carillion and retailer BHS.
It also followed wide-ranging criticism of the UK’s audit watchdog, the Financial Reporting Council (FRC), whose opponents said it was too close to the firms that it audits. The FRC is to be replaced a new body, the Audit, Reporting and Governance Authority (ARGA), after its effectiveness was heavily criticised in an independent review in late December.
Critics of the current state of the UK audit market say it is dominated by the Big Four – Ernst & Young, Deloitte, KPMG and PricewaterhouseCoopers – and that there is a lack of competition and new entrants.
Key role for audit committees
The CMA inquiry is what is known as a market study and can lead to a number of outcomes to improve competition in a sector, such as recommendations to government, enforcement action or even a full-blown market investigation.
Among its other proposals, the CMA wants the new ARGA to play a more aggressive role in holding audit committees to account.
This could include ensuring that committees report their decisions as they hire and supervise auditors, as well as the regulator issuing public reprimands to companies whose committees fail to scrutinise their auditors sufficiently.
The CMA has also said it could take more drastic action after five years if the reforms fail to deliver improvements.
In response, an FRC spokesperson said it welcomed the proposals, in particular “the recognition of the key role of audit committees and the proposed role for regulation in ensuring they deliver on this.”
Missed opportunities seen
Reaction to the report among other stakeholders was mixed, however.
Sharon Bowles, a former chair of the European Parliament’s economics affairs committee, told IPE: “I would have preferred a full operational separation of the firms’ audit and consultancy businesses because culture is at the heart of the kind of change that is needed.”
Bowles also told IPE that she regretted the lobbying campaign against similar proposals in the past.
“The great sadness is that we could have been here five years ago if the UK ‘establishment’ had not put its efforts behind diluting similar proposals from the EU,” she said.
Another long-standing audit critic, finance academic Prem Sikka, said the CMA’s proposals were a missed opportunity.
He said: “[A]nother opportunity to reform the serially dysfunctional auditing industry has been wasted. It is the third attempt in recent years by the CMA, and its predecessors, to reform the industry.
“The previous attempts in 2006 and 2013 neither secured competition, choice, improvement in audit quality nor value for money and the latest opportunity has again been wasted as the CMA has continued to appease the big accounting firms with minimalist reforms and neglect the concerns of stakeholders.”
The UK government has said it will respond to the CMA report within the next 90 days.