Risk & Economy » Audit » A brighter future for accounting?

The new year is here. Far from being left behind in 2018, discussions around the release of Sir John Kingman’s review of the Financial Reporting Council (FRC) and the Competition and Markets Authority’s (CMA) interim report are ongoing.

Duncan & Toplis responded to the open invitation to take part in the CMA consultation and the Kingman call for evidence, and I’m pleased that our suggestions and observations were considered.

Rebuilding the FRC

The Kingman report concluded that the FRC is not fit for purpose. Partly this stems from the perception that the FRC is too close to the big four.

Kingman said the regulator needed “new leadership, new mission, new powers and new funding”, and recommended the creation of a new body – the Audit, Reporting and Governance Authority (ARGA).

The problems at the FRC include issues around recruitment: The body regularly recruits big four alumni and rarely advertises openly for top jobs. The report found that only one out of 21 vacancies in relevant positions between 2016 and 2018 was advertised in the national press, while only six involved “external search consultancies.” Kingman suggested that though many members of the current regulatory body would move over to ARGA, the new board should be much smaller and there should be minimal overlap in senior management.

As well as recruitment issues, the FRC is partly funded by the same organisations it is supposed to be holding to account. Surprisingly, the body does not have authority to investigate all directors, just those registered as accountants, leaving accountants (and auditors) to take all the blame when things go wrong.

The creation of a new regulatory body (replacing the FRC) with more statutory powers, statutory funding and a clearer remit should bring about significant, positive change.

Big four shakeup

The CMA report into audit market competition found that the market is too heavily dominated by the big four and has suggested sensible reforms for the industry following a review of the audit sector.

While increased scrutiny on the tendering process and enforcing a clear split between the audit and other services offered by firms should bring improvements, perhaps the biggest proposed change would be the introduction of joint audits for all FTSE 350 companies requiring at least one firm appointed to be from outside the big four. Joint auditing would likely force auditors to ensure that their work is of the highest standard, making it much harder to get away with low quality work.

Among the other positives, these changes would be particularly good news for accountants like us because it would force the big four to open up the market and encourage larger companies to look beyond them for audit and accountancy services.

Moving forward

Although previous suggestions from politicians and other groups have had a tendency to offer unrealistic changes that place far too much pressure on auditors, these two sets of recommendations could make real, positive changes throughout the industry.

As was demonstrated by the collapse of major listed entities such as Carillion and BHS, the present regulatory framework and level of competition in the audit market have serious failings. With those in mind, the new recommendations offer realistic and reasonable solutions to some of the most serious problems in the industry – although questions remain as to how they will work in practice.

As one of the top 30 accountancy groups in the UK, the outcome of the reviews could have a positive impact on us and other groups our size. The reforms should loosen the grip that the “big four” have over the audit market and I they will go some way towards repairing the damage that has been done to the reputation of the accounting industry over recent years.

The government has now launched a new independent review into the current standard of the UK audit market that is being led by Donald Brydon, the outgoing chair of the London Stock Exchange. An advisory board has been tasked to build on the findings of the parallel reviews with a view to ensure our audit sector is world leading.

A full and final report will be revealed by CMA in due course, while a project plan from Donald Brydon’s independent review is expected any day. For now, we wait.

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