The Competition and Markets Authority (CMA) announces major recommendations today to address serious competition problems in the UK’s audit industry.
Key Recommendations: A Summary
The report states that legislation is required to address two key issues. First, the vulnerability of the industry to the loss of one of the Big 4 (Deloitte, EY, PwC and KPMG). Second, the current inadequate choice and competition.
To achieve this CMA recommends the separation of audit from consulting services and mandatory ‘joint audit’. The latter would enable firms outside the Big 4 to develop the capacity needed to review the UK’s biggest companies. In a further step, CMA wants to introduce statutory regulatory powers to increase accountability of companies’ audit committees. Its final key recommendation is a five year review of progress by the regulator.
The CMA’s final report results from extensive discussions with audit firms, investors and major UK companies on its update paper. It also takes account of the recommendations of a major report from the Business Select Committee, and the inquiry into regulation led by Sir John Kingman.
Analysis and Response
The BBC reports that in 2016-17, the Big Four accounted for 97% of FTSE 350 audits and 99% of FTSE 100 audits. CBI (Confederation of British Industry) President commented that quality improvement of audits must be “paramount”, but warned that some CMA proposals risked “damaging” the UK’s reputation. He added that “mandating joint audits will add cost and complexity for business with no guarantee of better outcomes.”