Last month, the UK’s Competition and Markets Authority released the final report of its audit services market study, recommending that the big four undergo an operational split to ensure that the audit arms are under separate management from the rest of the firms’ business.
It also called for mandatory joint audits, where big four firms to work alongside “challenger” audit firms to improve the quality of audits, as well as promote choice and competition.
While the report acknowledges the difficulties with getting international traction, CA ANZ assurance and reporting leader Amir Ghandar believes Australian firms need to be watching the UK’s developments closely.
Mr Ghandar also believes the ongoing Brydon Review, which will assess the quality and effectiveness of audits, and the recent Business, Energy & Industrial Strategy (BEIS) report, will need to be considered.
“We need to watch what’s going on in the UK very carefully. They’re opening up some big questions about regulation and the future of audit — it is important to have the full context of what is happening,” Mr Ghandar said.
“The CMA, and the recent BEIS report, has recognised the importance of the Brydon Review which has now started. This is looking at the future scope and purpose of audit, and we believe this is where the real underlying questions about the role of audit in addressing fraud, culture, corporate collapses and more can be opened up.
“It’s hard to tell what the next stop will be for these recommendations in light of the bigger matters being opened up by the Brydon Review, and uncertainty around when further consideration and possible legislation may be possible in light of the other things on the agenda in the UK right now (i.e. Brexit).”
Speaking on the CMA’s recommendations, Mr Ghandar said that, while the regulator had placed an appropriate focus on quality and independence, there were still concerns from the international community around some of the recommendations.
“In particular, while joint audits are proposed mainly as a competition remedy, this approach could be counterproductive in terms of audit quality,” he said.
“The potential dilution of accountability in the audit, and additional cost and disruption, could be problematic given audit quality really needs to be the focus right now.”
The Australian audit market
While the government recently committed $800,000 to improving audit quality in Australia, scrutiny around the local audit market has been heating up.
The Joint Committee on Corporations and Financial Services said it has expressed concerns about audit quality in Australia for “some years” now and believes there is merit for the Australian audit industry to undergo a “serious review”.
The Financial Reporting Council also recently delivered its assessment of the current state of auditor disciplinary functions, proposing that company auditors who are under investigation for poor audit quality should be named, and calling for ASIC to publish the results and identify firms in its audit inspection.
ASIC’s latest audit inspection also found that, in 24 per cent of the key audit areas reviewed, registered company auditors had not obtained reasonable assurance that the financial report was free of material misstatement.