CMA to review the UK audit sector; FRC to proceed with planned program of reviews
The UK Competition and Markets Authority (CMA) has announced it will conduct a review of the UK audit sector and deliver its findings by Christmas in the wake of recent scandals and declining trust. Separately, the FRC (which is the subject of an independent review) has also announced a program of reviews of the sector including consideration of banning audit firms from undertaking audit work.
The FRC under review: An independent 'root and branch' review (Kingman review) of the FRC is currently being undertaken and is due to be completed by the end of 2018.
The UK audit sector is under review by both the FRC and the CMA: The CMA review is being launched following the release of the Work and Pensions and BEIS Committee report into the collapse of Carillion plc which recommended (among other things) that KPMG, EY, PwC and Deloitte should be referred to the Competition Authority for possible break up. The CMA is due to deliver its findings by the end of 2018. The FRC is also conducting a series of planned reviews of the audit sector, including consideration of whether the audit firms should be banned from undertaking consulting work.
Restoring trust in the sector and the quality of audit has been identified as a key priority by industry, by the FRC and by the CMA. The CMA has indicated that legislative reform may be required to implement both the findings of its own review, and the findings of the Kingman review.
The UK Competition and Markets Authority (CMA) has announced the launch of a detailed market study into the audit sector to examine 'concerns that it is not working well for the economy or investors'. The review is being undertaken, the CMA writes, 'amid growing concerns about statutory audits, in particular following the collapse of construction firm Carillion and the criticism of those charged with reviewing the organisation’s books, as well as recent poor results from reviews of audit quality'. As part of its review, the CMA will investigate whether the sector is competitive and resilient enough to maintain high quality standards.
The announcement followed a separate announcement by the Financial Reporting Council (FRC) of completion of its 'state of the nation' review of audit in the UK, and a series of planned further reviews/actions into various issues in the sector.
A brief overview of the CMA review, and separately the FRC's planned reviews/actions is below.
The review will examine three main areas.
[Note: The CMA review is being undertaken following the delivery of a report by the Work and Pensions and BEIS Committees into the collapse of Carillion plc. Among other things the report recommended that KPMG, EY, PwC and Deloitte should be referred to the Competition Authority for possible break up. See: Governance News ]
The CMA writes that if the review finds that the market is not working well, it 'will scrutinise all proposals’ including the possible need for legislation to implement the its findings and those of the independent review of the FRC being led by Sir John Kingman.
[Note: On 17 April, the UK government announced the launch of an independent 'root and branch' review of the FRC to be led by Sir John Kingman (Kingman Review). The purpose of the review according to the government's statement is to 'make the FRC the best in class for corporate governance and transparency, while helping it fulfil its role of safeguarding the UK’s leading business environment'. See: Governance News 20/04/2018]
CMA Chairman Andrew Tyrie said 'If the many critics of the audit process are right, it is not just the companies which buy audits that lose out; it is the millions of people dependent on savings, pension funds and other investments in those companies whose audits may be defective. Sir John Kingman’s independent review of the regulator is a big step in the right direction. And the CMA will now examine the market carefully to establish what contribution more effective competition could make to improving audit quality.'
The CMA intends to consult on provisional views by the end of 2018 and to 'complete its work as soon as possible thereafter'. The CMA states that as part of this process it will take into account the views of a range of stakeholders including the Financial Reporting Council (FRC) as the sector regulator.
Prior to, and separately from, the CMA review The Financial Reporting Council (FRC) released its own a 'state of the nation' audit review covering audit quality, confidence in the sector and the future of audit. Based on the issues identified, the FRC also announced a further program of planned reviews, intended to address falling trust levels in the UK audit sector. The planned review actions include, among other things, consideration of whether auditors should be banned from consulting work.
Among other things, the FRC found that trust in the quality of audit is falling and that the 'Big Four' (PwC, KPMG, Deloitte and EY) still dominate both audit and non-audit consultancy work for listed companies which raises questions over conflicts of interest and independence.
Commenting on the release of the report, and the FRC’s planned reviews/actions, FRC CEO Stephen Haddrill said the planned 'comprehensive reform programme addresses fundamental issues underlying falling trust in business and the effectiveness of audit, whilst also looking to ensure that the requirements on what companies say about themselves are fit for the future needs of stakeholders. If stakeholders are to have confidence in audit, they also need to have confidence in audit rules and regulation. The FRC has reviewed how we can improve audit quality and our supervision of audit firms. In addition to the programme set out today we look forward to proposals from Sir John Kingman and the CMA.'
In an opinion piece, the FT suggested the FRC's release of the report, and suggested further actions, is as an indication that it is 'seemingly oblivious' to recent events and the criticisms that have been levelled against it and against the audit sector. The article adds that 'The watchdog [The FRC] has serially been criticised for its poor performance, its muddled structure and for being in thrall to the firms it oversees. The race is on to see which will be reformed first — the bean counters or their watchdog'.