Audit Reform vs. The Big Four

Recent consultation papers have included a number of key measures in order to diversify the UK professional services sector for audits to improve standards and offer viable alternatives to the Big Four. There have been three independent reviews so far and major failings are still happening due, in many cases, to the Big Four’s monopoly. As such, the consultation papers include provisions that challenger firms will be required to conduct a meaningful portion of the audit for the UK’s large companies, namely through shared audits, a proposal that has sparked significant controversy in recent weeks.

The Big Four have stated they will not be supporting proposals for shared audits, citing the potential doubling down on work, that they see no evidence the measure would improve the quality of audits and fears that not enough smaller firms would be interested in taking part. These firms audit 97% of the FTSE350 and also compete for hugely more lucrative ‘other professional services’ with the same client. As such, the introduction of these proposals will have huge knock-on impacts on the choice, quality, and availability of audit services in the market, meaning positive collaboration with the Big Four and alignment in assessments for how to effectively transform the sector will be near essential.

The Big Four’s reluctance to enter into shared audit seems to predominantly boil down to a risk issue; albeit a combined or shared audit, the Big Four will undoubtedly be in the firing line for the overall quality of the audits by virtue of their status, who they are as a company, and their having the ‘deepest pockets’.

The public must perceive audits as independent at all times in order to avoid their losing faith in the market, making these diversification processes more essential than ever.

The Big Four have already made clear that their appetite for shared audits is next to none due to the additional costs incurred in order to ensure the quality of these audits throughout are at the standard required to avoid the aforementioned ‘firing line’.

What’s more, concerns from the Big Four surrounding how the riskier areas of these shared audits will be managed would not be misplaced. Will it be expected that one firm will cover these more risky areas? Or will these areas remain combined? If the latter, this runs the risk of the audit and its riskier areas becoming ever more complex, running increased risks of shared audits failing to meet the standards required.

Due to the monopoly of the Big Four in the audits of these companies, smaller firms often also have less expertise and significantly less experience with the audits of these major UK companies. Thus, both these smaller firms as well as the Big Four firms managing these shared audits in collaboration may not have the confidence in the quality of certain areas of the audits they are undertaking.

It seems, therefore, that while these shared audits have been proposed with the best of intentions for a highly anticipated diversification of the sector, improving standards in the process, there are some growing pains left to work out. Indeed, some of the smaller or ‘challenger’ audit firms have expressed the view that the shared audit requirement falls some distance short of the Competition and Market Authority’s (CMA) envisaged joint audit approach.

The proposed time period (5-9 years) over which the progress of market capture by these challenger firms would be monitored may also potentially prove to be far too long, with the approach appearing to be incremental in nature as opposed to more immediately transformative.

However, the initial response of many ‘challenger’ audit firms to proposals for a diversification and transformation of the sector have been encouraging. Firms are keen to see diversification, providing for a much-needed revamp and improvement of standards following scandals surrounding Pâtisserie Valerie, Carillion, Thomas Cook and more.

Before some of these challenger firms can take on large and complex audits, they will naturally need to invest in their audit capabilities in order to give confidence in their ability to audit some of the most complex businesses. Such investments may not be financially feasible for firms of a certain size, meaning we could therefore see fewer challengers entering the space, this is an excellent opportunity for professional service firms that have grown and significantly increased their experience here.

This is an excellent opportunity for many firms to expand their experience, taking on the audits of larger companies. Nevertheless, some challengers may not want to enter such a high risk space, especially if they perceive proposed shared audit structures to mean these increased risks will not be matched by the rewards. Additionally, some other firms may instead wish to focus on non-audit services, resulting in less choice for businesses, proving counterintuitive to the intended outcome of the proposals – an impact that could become even starker when, in due time, the elements of the operational separation requirements are also applied to these smaller, challenger firms.

It will therefore be essential for challenger audit firms to evaluate the investment needed to be able to take on more complex and demanding audits and start to plan how to position themselves in the future. While they naturally carry increased risks, the potential long-term rewards are great not only for individual challenger firms but for wider industry health and staying ahead of the curb, as the UK professional services sector has done so successfully for years.

Independence of the Big Four’s audit and consultancy services is crucial. While we are seeing a number of challenges with shared audits, other methods to diversify the sector also offer significant potential and must be explored as professional services seek to diversify and seek to stay ahead of the curb. We cannot risk jeopardising the independence of audits for UK firms because of lucrative consultancy services provided by the same client, as much as we cannot risk the quality of audits due to lack of experience.

Almost as important is the issue of ‘perception’. The public must perceive audits as independent at all times in order to avoid their losing faith in the market, making these diversification processes more essential than ever.

At Theta Global Advisors, we do not audit and hence, we are one of the few truly independent accounting advisory firms for non-audit professional services. Mid-sized firms such as ours that are disrupting the industry in a truly unprecedented manner are seeing great success having worked on major accounts this year. Kwasi Kwarteng’s proposals for shared audits working with the Big Four is just one way we can attempt to seamlessly diversify the sector, with mid-sized firms having shown they can take on previously inaccessible, large clients already without necessarily the need for shared accounts with larger, Big Four firms. For London to continue as a top choice globally for professional services, it is essential to stay ahead of the curb moving forwards, be that through shared audits or caps on the Big Four’s existing monopoly.

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