The CMA recommendations for audit reform are finally published

The Competitions and Markets Authority (CMA) has published a paper on audit reform proposing a raft of measures to make the system more independent and improve the quality of audits.

Following public scandals including the collapse of Carillion and the discovery of fraud at Patisserie Valerie, there has been widespread clamour for reform.

The CMA launched a market study in October. This identified a number of reasons why audit quality has been falling short:

• Companies choose their own auditors, and as a result they pick those with whom they have the best “cultural fit” or “chemistry” rather than those that offer the toughest scrutiny
• Choice is too limited with the Big Four conducting 97 percent of the audits of the biggest companies
• Auditors’ focus on quality appears diluted by the fact that at least 75 percent of the revenue of the Big Four comes from other services such as consulting

Proposals put forward by the CMA include:

• Legislation to separate audit from consulting services. This would not mean a break-up of the Big Four, due to the international nature of their business and the complexity of such a measure.
• Measures to substantially increase the accountability of those chairing audit committees in firms.
• Imposing a joint audit regime to give firms outside of the Big Four a role in auditing the UK’s biggest companies. At least one of the firms in each audit would have to be outside of the Big Four, to encourage competition. A market-share cap is also being considered.

Most companies involved in the audit market, including the Big Four themselves, have made public statements on the changes they think should be made.

KPMG, Deloitte and PwC have all given their backing to proposals to separate audit from other services which a firm can offer.

“Addressing the deep-seated problems in the audit market is now long overdue,” said CMA chairman Andrew Tyrie.

“Most people will never read an auditor’s opinion on a company’s accounts. But tens of millions of people depend on robust and high-quality audits.

“If a company’s books aren’t properly examined, people’s jobs, pensions or savings can be at risk.”

What happens next

The report will now go out for consultation. But Tyrie said the CMA plans to “persist until the problems are addressed” if it turns out the proposals are not far-reaching enough.

He said the “intractable problems” may take some years to sort out.

Sir John Kingman is also set to release a report examining the shortcomings of the current audit regulator, the Financial Reporting Council.