More radical audit reform needed
UK partners of Deloitte, KPMG, PwC and EY will groan at the advent of another inquiry into audit competition. They should stifle their sighs. More radical reform of audit is urgently needed given the continuing conflict between audit and nonaudit work, the weak oversight of auditors, and the glaring ineffectiveness of previous attempts to introduce more competition.
Since 2013, when the UK Competition Commission completed its last report, there has been less change in the audit market than in UK antitrust regulation, which was transformed by the creation of the Competition and Markets Authority. The authority has understood the need for urgency. Building on work done for previous inquiries, it has launched a “market study”, the swiftest investigation in its armoury, and promised provisional findings before Christmas, fast even by the standards of such studies.
In theory, nothing is off the table. In the 40-page outline of its brief, though, the Competition and Markets Authority is clear that certain remedies hold more promise than others. It mentions three: measures that would increase competition between the Big Four; those that would encourage competition from smaller rivals; and those that would address the skewed incentives in the selection and payment of auditors.
A separate independent investigation is under way into the Financial Reporting Council, the UK regulator. This is not the moment to abolish the watchdog, though its ties with the Big Four must be loosened or cut. If anything, once reshaped, it should be given more power. With added clout and independence, the Financial Reporting Council could apply and enforce whatever measures the Competition and Markets Authority recommends.
Possibilities include separating audit and nonaudit functions of the Big Four, or breaking the quartet into smaller firms that can offer both accounting and consulting. Choice will widen if separate measures reinforce auditors outside the Big Four, by giving them access to larger rivals’ technology platforms, say, or encouraging joint audits. /London, October 10.