Business owners may soon change their stance and see audit in a more positive light as a result of the UK government’s impending sector overhaul, industry participants say.
The crackdown was outlined in a whitepaper published by the Department for Business, Energy and Industrial Strategy (BEIS) earlier this year. Breaking up Big Four dominance, avoiding company failures and improving the quality of audit are among the primary aims of the shake-up.
“This is our chance to reposition auditing as true horizon-scanners, able to analyse data and performance to help businesses become better placed for long-term success,” said Kevin Hodgetts, partner and audit specialist at UK accountancy firm Haines Watts.
“We should be trying to move the conversation away from audits being something to be avoided, and instead help businesses to appreciate the insight they can give.”
The reaction comes as a recent Haines Watts poll depicted UK business owners’ disdain for the audit process. It found that, while 54 percent see audits as a “great opportunity to challenge the status quo”, the remaining 46 percent view them as a “necessary evil” or a “major headache”.
But Hodgetts believes a shift in perception is on the horizon. The value of a “thorough, robust audit” will be made clear to business owners as a result of the incoming changes, he argued.
“There were clearly flaws in the ways that some of our biggest companies were being scrutinised. There are some radical aspects to the reform, not least the attention-grabbing proposed cap on FTSE 350 audits, and the idea of shared audits.
“Many large businesses will never have experienced the benefits that audit can bring as a business planning tool, when it’s been carried out by a trusted partner who really understands the business involved. A good audit provides an opportunity to make businesses more robust, more investable and will help to identify and navigate risk.”
BEIS’ aim of improving the audit market by increasing competition and diluting Big Four dominance, Hodgetts argued, is the key to demonstrating this value to business owners.
Within this wider goal, proposals include the introduction of managed shared audit, whereby a so-called ‘challenger’ firm would be required to participate in all FTSE 350 audits. A cap on market share has also been touted.
This consistent Big Four dominance was further demonstrated by an FRC report published in July. It showed that, while challenger firms increased their share of FTSE 250 audits by nearly three percent, all FTSE 100 companies continue to be audited by a Big Four firm.
Hodgetts views are echoed by Dr Nigel Sleigh-Johnson, director of the Institute for Chartered Accountants in England and Wales’ (ICAEW) Technical Strategy Accountability Group. He argues that, although the scepticism among business owners depicted in the Haines Watts poll is “not surprising”, the proposed BEIS reforms will indeed contribute to altering this perspective.
“Really good quality audit can do much more for the business than simply sign off the accounts. It can be just a compliance function, but that’s a bit of a wasted opportunity,” he says.
“Lots of companies don’t realise they have problems with their controls or that they could be so much better. Current audits address that to an extent, but the proposals will sharpen the focus in that area and that should benefit many businesses.”
Sleigh-Johnson also points out that, while the BEIS proposals are most likely to have a positive impact on larger audits, work is also being done by the International Auditing and Assurance Standards Board (IAASB) to improve the quality of the service for SMEs.
As the international standard setter for audit, the IAASB is due to release an exposure draft of its consultation on ‘audits of less complex entities’.
“This, if adopted in the UK, has the potential to significantly enhance the efficiency of many smaller audits. It could also free up resources for auditors of SMEs to really provide the sort of advice that companies really need.”