Joint audit could inject some competition into the market

Last week, the House of Commons’ Business, Energy and Industrial Strategy select committee opened hearings on its influential inquiry into the future of audit.

Top of its agenda will be the proposed remedies set out by the Competition and Markets Authority (CMA) in its recent review, which could bring wholesale change in the UK’s listed audit market.

There is broad consensus that the audit model for the largest companies is currently not fit for purpose. High-profile corporate failures such as Carillion have brought what was once considered a rather technical subject into the spotlight, and there is political will to drive through change.

The CMA has concluded that the overwhelming concentration in the listed audit market, where the Big Four accountancy firms audit 99 per cent of the FTSE 100, poses significant threats to audit quality.

Competition and quality in the audit market are inseparable. It is widely accepted that addressing the long-standing levels of concentration would raise quality, increase market resilience, and help meet the evolving needs of all stakeholders, including those of wider society.

However, while there is broad agreement over what needs to happen, there are multiple opinions on how we get there. A range of solutions have been suggested, from a market cap to a split between audit and advisory businesses.

At the centre of the CMA’s reform package is the idea of mandatory joint audit in the FTSE 350, with at least one of the auditors being from a challenger firm.

The idea would be for each auditor to undertake a live review of the other’s work before arriving at a joint opinion on the accounts.

This would increase levels of scepticism, improving the quality of corporate reporting, provide diverse expertise to assess the most complex issues, and enable regular rotation of work, which would reduce over-familiarity.

Crucially, joint audit would unlock the energy and innovation associated with new participants in a market. It is a tried and tested way of reducing concentration, enabling smaller firms to gain experience and grow. In France, where it has been required for many years, concentration is less pronounced than in any other major economy.

Despite these benefits, mandatory joint audit looks set to attract stiff resistance from some quarters.

The opposition will focus in part on supposed cost increases, but analysis of the top listed companies in France compared to their UK counterparts shows no substantial evidence for the alarming claims made by some parties.

And even if fees were to rise, the overwhelming value of greater reliability of UK financial information would far outweigh moderate potential cost increases.

Removing barriers to entry in the listed audit market is now firmly on the agenda. We will be pleased to play our part in the ongoing debate on how best to achieve these goals.

There is a momentum for change, and the current sense of urgency must not be lost.

Public trust in the financial state of the UK’s leading companies is at stake. Joint audits can and should be part of the solution.