U.K. Regulator Launches Investigations Into Scandal-Hit Audit Sector

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Friday, October 12, 2018   14.24PM / By Nina Trentmann of WSJ

 

The U.K. Competition and Markets Authority has launched a review into the country’s audit sector to examine whether it is competitive and resilient enough to maintain high standards of quality, the regulator said Tuesday.

 

The study will investigate whether companies have enough choice when selecting an auditor, whether the Big Four accounting firms—Ernst & Young LLP, KPMG LLP, Deloitte Touche Tohmatsu Ltd. and PricewaterhouseCoopers LLP—are “too big to fail,” and whether there are enough incentives for auditors to challenge the companies they audit, the agency said in a statement.

 

The move comes as concerns increase about the quality of statutory audits in the U.K., in particular following the collapse of construction firm Carillion PLC earlier this year.

 

Representatives of the U.K. Labour Party, including Shadow Chancellor John McDonnell, in September suggested a break up of the Big Four, or setting a ceiling on the audit market share of each company. Two parliamentary committees had in May proposed referring the matter to the competition authority.

 

The Financial Reporting Council, the regulator for reporting, accounting and audit, in March called for an investigation into whether the Big Four would have to spin their U.K. audit units into separate businesses.

 

“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,” said Chairman Andrew Tyrie of the Competition and Markets Authority.

 

Representatives from the four major accounting companies said they welcomed the study, adding that confidence in the audit process is key to the success of the profession.

 

“We are supportive of measures that encourage choice as well as a robust audit market,” said Stephen Griggs, head of audit at Deloitte, in a statement.

 

The agency’s latest action follows an earlier announcement by the Financial Reporting Council. That agency on Monday said it would review U.K. audit quality by testing existing rules on auditor independence, determine if additional action is needed to guarantee the level of independence, and consider banning auditors from doing consulting work for bodies they audit.

 

The watchdog said it has expanded its enforcement capacity to conclude cases quickly and revised its sanctions framework.

 

“This comprehensive reform program 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,” Stephen Haddrill, chief executive of the council, said in a statement.

 

Large, listed U.K. firms have for the past six years been required to re-tender audit contracts every 10 years, followed by an obligation to rotate auditors that was introduced in 2016. But, 97% of FTSE 350 companies are audited by the Big Four, a consequence of the re-tendering exercise, according to the council.

 

“The largest U.K. companies still turn almost exclusively to one of them [the Big Four] when selecting an auditor to review their books,” the CMA said in its statement. It plans to release its provisional findings before Christmas.

 

“There is a widely accepted need for reform of the listed market,” said Phil Verity, a senior partner at Mazars LLP, in a statement. “Previous attempts at reform have not brought about the necessary change.”

 

 

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