Will the new recommendations from the CMA help rebuild trust in the audit sector?
Michael Izza, chief executive of ICAEW, says YES.
The proposals from the Competition and Markets Authority (CMA), alongside the Kingman Review, are the kind of bold intervention in audit that we have been calling for.
Breaking up the larger firms was unlikely to address underlying issues of quality and choice, given the difficulties in attracting smaller firms in the market and the need to recognise that large players are part of international networks. Separating audit and non-audit services within firms is a much more pragmatic option, and allows the companies to remain multidisciplinary.
The CMA is keen on joint audits, whereby the Big Four share clients with smaller firms. This has worked in a few other countries, and may provide a mechanism for attracting challengers into the FTSE350 market, allowing them to acquire experience at that level.
These proposals will now be subject to consultation. We look forward to working with all sides to turn them into practical recommendations for regulation and legislation, ensuring that audit meets the future needs of British business.
Jan Bouwens, research fellow at the Judge Business School, University of Cambridge, says NO.
The audit industry needs a shake-up, but by paying too little attention to the academic evidence, there is a risk that the CMA could miss the target, and potentially make the situation worse.
Proposals that divide audit and advisory services are at odds with existing research which convincingly shows that audit quality is enhanced when accounting firms offer both audit and advice. Rather than institutionally separating these functions, the underlying problem can be solved if the same accounting firm cannot audit and advise the same corporations.
The evidence around mandatory joint audits suggests that they have a severe free-rider problem – where one firm can afford to exert less effort into their work.
Policy change is needed, and proposals in the Kingman Review to strengthen accountability and the regulatory regime are welcome. But we also need a debate about what we expect. If we are aiming for audits to have increased scope and never contain errors, we will need to pay for that.