The Competition and Markets Authority (CMA) announced on Tuesday 9 October that there would be a detailed investigation into the statutory audit market, with a focus on how to improve the auditing process, as well as ascertaining that the FTSE 350 market is not associated solely with the Big Four.
Today, Grant Thornton has released their official response to CMA’s audit market study; the top ten firm noted early on in this statement that their response relates particularly “to the development of an independent body to appoint auditors and the non-audit services that should not be provided by the auditor.”
Perhaps most importantly, Grant Thornton underlined that they, too, agreed with CMA’s statement that there will not be a single, simple solution that can be applied across the audit market. The firm further highlighted that the CMA should be careful “not [to] impose measures which disturb that well-functions market or act as [a barrier] to expansion for mid-size and smaller companies.” Instead, reform of the audit sector should rather focus on strengthening the independence of auditors of UK PIEs and continuing to focus on removing biases in favour of the Big Four.
The firm’s report continued: “Grant Thornton does not believe that structural reform is needed, even to the extent of ring-fencing audit from advisory services within a firm.” Furthermore, Grant Thornton has noted “the fact that some potential reforms could have the unintended consequences of worsening the competitive landscape.”
Grant Thornton has agreed that competition in the supply of auditing services to PIEs in the UK is still not working efficiently. It is notable that changes have resulted in an increase in companies switching auditor with more regularity. However, Grant Thornton has pointed out that this switching has mainly been limited to the Big Four, thus not generating as much effective change as is needed in the industry.
“This lack of effective competition was a central factor in Grant Thornton’s decision, taken earlier in 2018, to withdraw from future tendering for the provision of audit services to FTSE 350 companies,” the firm revealed.
As they viewed the current market to not be a “level playing field, Grant Thornton made the commercial decision to therefore stop investing in “what were very high cost tenders that offered little possibility of success.”
Considering the argument as to whether there should be a marked separation of audit and non-audit practices within the Big Four, Grant Thornton commented that this practice “would create a group of Big Four audit-only firms, with the same level of market, rather than split their business to compete for PIE audit mandates.”
In their official statement, Grant Thornton cited that, although the firm does benefit commercially from providing both audit and advisory services, they “see [the] value in prohibiting firms from receiving non-audit fees from PIE audit clients.”
However, the firm definitively outlined that “there are certain services which are currently defined as ‘non-audit’, but are compatible with and, indeed, complementary to, the provision of high-quality audit.” Thus, there is the argument that a clearer distinction between audit and non-audit services could be outlined by CMA in their official findings report, which is due some point next month.
Along a similar vein to Mazars, Grant Thornton has said that they see the value in the potential for joint or shared audits – a system that is used heavily in France, “where there is better market stability, with fewer high-profile failures, and greater public trust in auditing.” This is something Grant Thornton believes can be supported by an independent auditor body.
Jon Roberts, head of assurance at Grant Thornton UK LLP, concluded: “We believe that competition in the audit market for large companies and public interest entities (PIEs) is not functioning well and that the measures introduced following the last Competition Commissions investigation have not been as impactful as would have been desired. The CMA’s investigation reflects many of the same concerns that led to our unique position of withdrawing from tendering in the FTSE 350 audit market, due to its broken nature.
“We see this CMA study as a change to better align audit services with core public interest considerations and believe we have a useful perspective to contribute. Even though we may be [considered] potential beneficiaries of reform, we support the objective of reducing concentration in the FTSE 350 audit market because we believe in the principles of effective competition and the consequent benefits on audit quality. We note that the CMA acknowledge that audit scope is also in need of attention, but that is not the primary purpose of its study.
“Considering broader reforms to audit scope, such as increased work on a company’s viability and its anti-fraud arrangements will be important questions for any further reviews on the audit profession in future to answer.”