Calls for caution over proposed shake-up to the audit sector

Competition and Markets Authority’s (CMA) proposed introduction of joint audits unlikely to be a “silver bullet”, MPs told.
In response to the high number of company failures in the past year, and following a review of the audit market, CMA proposed a series of reforms, including splitting the audit and advisory businesses at big accountancy firms, regulatory scrutiny of auditor appointments and management, and a joint audit regime for FTSE 350 companies.
However, in the first in a series of Department for Business, Energy & Industrial Strategy (BEIS) select committee hearings, held yesterday, audit academics and investment managers expressed concerns that the shake-up could risk unintended consequences for auditing.
Commenting on the proposal to introduce a joint audit regime, aimed at improving good governance by encouraging auditors to focus exclusively on audit and not on also selling consulting services to the firms they are auditing, Karthik Ramanna, professor of business and public policy at the University of Oxford, told MPs: “I think that it’s unlikely to be the silver bullet to solve this problem”.
Dr Ilias Basioudis from Aston University Business School, said: “There is mixed academic evidence that joint audits improve quality, independence and choice,” adding that there could also be “unintended consequences” such as increased costs for firms.
These doubts were echoed by Vinita Mithani of Middlesex University Business School, who expressed concerns that a joint audit system, similar to the one already used in France – which has not helped smaller firms win large audits – could lead to “two audit firms competing to be management’s favourite”.
“We don’t seem to fully understand the relationship between the auditor and management, and the people who are actually meant to be their clients,” Ms Mithani said. “With increased competition, in the current set-up what you’re getting is more audit firms vying to get the audit client, and it’s usually by demonstrating that the audit partner is the right personality fit for management, which is counter intuitive.”
Investment managers did however offer some support for the proposals, suggesting that the government could consider a phased rollout across key companies to test the changes.
The inquiry continues.
Effective management accounts and company audits
When putting processes in place for effective business administration, sound management accounts will enable better control of your financial situation and awareness of the business in real time. This can be effective not only in detecting and countering fraud, but also in enhancing planning for the peaks and troughs. In turn, while many companies do not need an audit due to rising thresholds, an audit can give comfort to business owners and act as a fraud deterrent.
At Beavis Morgan, we work with our clients to put processes in place which make it easier to run your business, reduce risk and maintain effective management of your company’s working capital.
Contact Steve Govey or your usual Beavis Morgan Partner for further information about how we can assist you and your business.