StocksMarket.in

Big Four audit shake-up will lack 'any meaningful impact', says rival

April 11
23:04 2021
KPMG

KPMG

The head of audit at Mazars has criticised ministers’ plans to make Big Four accountants share some of their work with smaller firms, saying the proposals will have little impact on the market.

David Herbinet said the introduction of managed shared audits, which were proposed by Business Secretary Kwasi Kwarteng last month as part of efforts to reform the industry, do not go far enough.

His comments will undermine hopes that the scheme can shake up a profession which has been repeatedly accused of missing accounting scandals and fraud.

Mr Herbinet said: “The main concern is that, fundamentally, managed shared audits are not going to have any meaningful impact on the market’s resilience, which I think has got to be one of the key objectives in all of this.”

The proposal was revealed last month as part of the business department’s 232-page white paper on how to reform the audit industry in the wake of high-profile corporate collapses such as Carillion and BHS.

Mr Kwarteng said he wants to use managed shared audits to increase competition and choice in the FTSE 350 audit market, and to allow smaller firms to audit a proportion of a company’s business such as its subsidiaries. The aim is to give mid-tier players more experience so that in time they can rival the Big Four of Deloitte, EY, PwC and KPMG.

The Big Four auditors in numbers

The Big Four auditors in numbers

But Mr Herbinet instead backed calls for joint audits, where two or more firms are appointed to take equal responsibility for an entire group. These were proposed in a 2019 review by the Competition and Markets Authority (CMA).

He added: “One hundred per cent of the FTSE 100 is still audited by the Big Four and it would just be impossible to have a market absorb the work if one of the Big Four left the market.

“So, resilience is paramount. The CMA was convinced that joint audits would help address this issue of resilience over time and I am far less convinced that managed shared audits will have an impact on this.”

Mr Herbinet said Mazars would support managed shared audits only if they were used as a temporary measure ahead of a joint audit regime.

In 2019, the CMA said: “More choice and competition for the audits of big businesses can and should drive up their quality, but the barriers to entry for ‘challenger’ audit firms are currently large.

“Challenger firms should work alongside the Big Four in these joint audits and should be jointly liable for the results.”

The audit consultation also confirmed that Big Four firms must ringfence their audit and consulting arms to reduce conflicts of interest. The Big Four could face a cap on their market share of FTSE 350 audits if competition does not improve.

The changes will be overseen by the UK’s new beefed-up audit watchdog, the Audit, Reporting and Governance Authority, which will replace the Financial Reporting Council and could have power over large unlisted companies as well as those on the stock market.

A spokesman for the Business Department said: “Greater competition in the audit market will increase resilience over the long-term.

“Through our ambitious Audit White Paper, we intend to introduce managed shared audit, so that smaller companies have an opportunity to grow and increase their market share without being exposed to joint and several legal liability.”

Archives