The Competition and Markets Authority (CMA) has published its final report with recommendations to address serious competition problems in the UK audit industry. The CMA’s recommendations follow extensive discussions with audit firms, investors and major UK companies on its update paper, published in December.

Falling short

The CMA is recommending the separation of audit from consulting services, mandatory ‘joint audit’ to enable firms outside the Big 4 to develop the capacity needed to review the UK’s biggest companies, and the introduction of statutory regulatory powers to increase accountability of companies’ audit committees. CMA chairman Andrew Tyrie said “people’s livelihoods, savings and pensions all depend on the auditors’ job being done to a high standard. But too many fall short - more than a quarter of big company audits are considered sub-standard by the regulator. This cannot be allowed to continue.” The recommendations also take account of a major report from the Business Select Committee, and the inquiry into regulation led by Sir John Kingman, and the results from Sir Donald Brydon’s review on the quality and effectiveness of audit.. CMA chairman Andrew Tyrie said “the Government now has three reports to hand. In large part, they come to similar conclusions. Conflicts of interest cannot be allowed to persist; nor can the UK afford to rely on only four firms to audit Britain’s biggest companies any longer. Early action will require legislation - hence the CMA’s proposals.”

No structural split

The recommendations propose an operational split, explaining auditors should focus exclusively on producing the most challenging and objective audits, rather than being influenced by their much larger consultancy businesses. However, given the difficulties with an immediate global structural split, the CMA is - at this stage - recommending an operational split of the Big 4’s UK audit work. The report also states that more choice will increase resilience and should drive up quality. CMA recommends that the regulator should hold audit committees more vigorously to account, and the regulator should review the effects of these changes periodically, in the first instance five years from full implementation. CMA’s chief executive, Andrea Coscelli, also commented “our recommendations, along with improvements to regulation and clarifying the purpose and scope of audits, will ensure the UK strengthens its position.”