A momentous time for the profession: 2018 ends on audit recommendations
Today marks the end of my first year in role. It also marks the publication of a series of reports that will have a major impact on the statutory audit market.
These include the Competition and Markets Authority’s (CMA) review of the Statutory Audit Market and the Kingman review of the Financial Reporting Council (FRC). I think we all recognise that reform is overdue.
Additionally, BEIS announced an independent review to be chaired by Donald Brydon, which has been tasked with recommending what more can be done to ensure audits meet public, shareholder and investor expectations.
We trust that this will take on board the comments made by the CMA in the appendix to its report which highlight the need for consideration to be given to the purpose and scope of audit (both now and the future).
This is where ICAS believes the key focus has to be placed to address the audit expectation gap.
The optimum outcome is likely to be a combination of several themes, including the role and purpose of corporate reporting, a review of the scope of audit, improved audit regulation, enhanced corporate governance and increased choice and competition in the audit market.
For now, the profession should welcome the Kingman and the CMA Reports; everyone may not agree with the proposals, but we have all been waiting on their publication! They are a catalyst for change.
ICAS wholeheartedly welcomes the proposed reforms of the FRC, and supports the desire for the UK’s regulator to have a more focused remit and purpose to provide high-quality regulation of PIEs.
The global landscape has changed. We are not simply concerned with the regulation of auditors or the members of six professional bodies, but rather with the wider stewardship and financial reporting of those companies that are deemed core to the UK and global economies.
A new purpose will help build a strong framework that engages PIEs, auditors and investors in a joint enterprise.
The plans for the new house that Sir John Kingman has set out in his report, reflect many of the features that ICAS called for in our response.
We strongly welcome some of the designs. A new purpose will help build a strong framework that engages PIEs, auditors and investors in a joint enterprise to achieve the highest quality of corporate governance of PIEs.
Strong governance, transparent and accountable, appropriately-skilled and independently-funded are realistic aspirations. When we build this new house, there will be an enforcement regime that recognises the UK’s unitary board structure and presents a level playing field that holds all PIE board members to the same standards.
Joint audit of FTSE 350 entities is one of the key proposals.
If introduced, many of the CMA proposals will result in wide-ranging reforms to the audit market; their potential impact on audit quality is not known and will need to be carefully considered. Joint audit of FTSE 350 entities is one of the key proposals.
ICAS published a literature review in 2012 which analysed research on joint audit to that date, concluding there was limited empirical support that joint audits lead to ‘increased audit quality’.
Additionally, there was some empirical support from joint audit opponents that they lead to additional costs.
We note that the CMA has been advised by The Haut Conseil du Commissariat aux Comptes (H3C), the French public audit oversight body, of its strong belief in the positive impact of joint audit on audit quality.
However, this is support from only one jurisdiction. Joint audits are not widely adopted across the world and indeed in the EU, only France adopts such a position.
Some firms, but not all, that carry out or have carried out joint audits would support their operation as being effective, but notable issues remain on accountability, liability and cost.
The ICAS voice will be heard at what is turning out to be a momentous time for the profession.
We do note that the CMA proposes the need for a gradual phased approach to introducing joint audit, which we believe is essential.
Over the coming weeks, we will digest the recommendations and proposals which have been published today. There will undoubtedly be benefits, but the detail of the practicalities needs to be examined before such a step is taken.
You can rest assured that the team here at ICAS and our supporting groups of volunteer members are already on the case scrutinising these proposals to ensure that ICAS voice will be heard at what is turning out to be a momentous time for the profession. Keep watching this space!