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Audit should be part of a holistic review

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By James Barbour, Director, Policy Leadership, ICAS

6 November 2018

Key points:

  • ICAS has submitted its response to the CMA's review of the large company audit market in the UK.
  • Our response to Sir John Kingman’s review of the FRC and previous ICAS publications informed our submission.
  • Our key messages to the CMA are set out below.

Last week ICAS responded to the Competition and Markets Authority’s (CMA) Invitation to Comment on the Statutory Audit Market, the review which is considering the large company audit market in the UK.

This response built upon our earlier submission to Sir John Kingman’s current review of the Financial Reporting Council as well as previous ICAS publications in the area of audit, including ‘The Future of Assurance’ (2010) and ‘Balanced and Reasonable’ Discussion Paper (2013).

The key ICAS messages to the CMA were as follows:

1. There is a need for a Government supported multi-stakeholder review into the UK corporate governance and corporate reporting frameworks that would encompass a review of the role and purpose of audit and consider whether it needs to evolve to better meet current and evolving stakeholder expectations.

The objective would be to improve the level of quality and trust in audit and its role in supporting the viability of Public Interest Entity (PIE) companies as well as considering whether the scope of audit requires to be expanded.

This would include looking at whether non-GAAP measures should be brought into the scope of a more formal assurance process and also whether assurance is required on other corporate information that is reported by the company e.g. investor briefings. Consideration might also be given to the US requirements on the effectiveness of an entity’s internal control over financial reporting (and the integrated audit approach).

2. It will only be by giving due consideration to the role and purpose of statutory audit in the context of the broader corporate governance and corporate reporting environment that significant changes can be identified for consideration and, if supported, implemented. It is however important to recognise that audit change alone will not eliminate the risk of future corporate failures.

There should be increased transparency of the audit committee tender process.

3. Any review of the market for audit in the UK should consider both the “demand” as well as the “supply” side to ensure a full understanding of the market.

4. Shareholders need to engage with audit committees of their investee companies. Many board directors have commented that while investors engage on matters relevant to the remuneration committee, there is little or no engagement on the matters addressed by the audit committee which arguably go to the heart of the quality of their investments.

We support a complete prohibition on audit firms providing non-audit services to their PIE audit clients.

5. There should be increased transparency of the audit committee tender process and this should be communicated well in advance of the actual process commencing, including disclosure of the audit committee’s key criteria for assessing the qualities they expect of their statutory auditors.

6. We support a complete prohibition on audit firms providing non-audit services to their PIE audit clients (at least the FTSE 350), subject to a small agreed list of permitted assurance related services. The assurance and audit related services that could be allowed to be provided to PIE audit clients should be reviewed and clarified, and a list of permitted services prepared accordingly.

7. Consideration may need to be given by the CMA and FRC as to whether or not the existing auditor liability regime should be adapted. The current auditor liability regime concentrates the audit of the most complex PIE companies within a very small group of firms who have the capacity to invest in the training and technology required to manage this risk and who have the diversification and scale to absorb liability for failings should these arise.

We do not support an independent appointment process for a company’s auditor.

8. A market share cap on the Big Four is a supply solution and if properly constituted could create opportunities for mid-tier firms. However, considerable obstacles would need to be overcome in the design of any quota system. These hurdles would include the scope of the market and the basis on which any market cap is set.

9. We do not support an independent appointment process for a company’s auditor. To go down this route fundamentally disenfranchises the audit committees of PIE company boards and leaves them with the accountability for performance and outcome of an audit whilst not having any direct control over the selection and appointment. Such a situation is neither equitable nor sustainable.

CMA needs to consider the interface of its proposals with the wider review of audit regulation and oversight being undertaken.

10. There is also a need for more constructive dialogue between the FRC and CMA to ensure the respective objectives of both bodies are aligned.

11. We welcome exploring with the CMA how the professional accountancy bodies could assist audit firms outside the Big Four to build capability and capacity, with a view to increasing choice in the FTSE 350 audit market.

12. The CMA needs to consider the interface of its proposals, with the wider review of audit regulation and oversight being undertaken by Sir John Kingman’s review. In particular, corporate governance, audit regulation and enforcement are of relevance to the CMA market study.

Thames bridge in the sunshine

ICAS sets out vision for a refreshed FRC

By Michelle Mullen, Executive Director of Standards, ICAS

25 October 2018

We need to join the dots between Kingman + CMA

By Bruce Cartwright CA, ICAS CEO

31 October 2018

2023-03-MarksElectrical 2023-03-MarksElectrical
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