The collapse of Carillion has prompted the Competition and Markets Authority (CMA) to launch a review of the audit sector amid concerns it is not working well for the economy or investors.
The CMA said it would investigate whether the sector, dominated by the so-called ‘big four’ accountancy firms (EY, Deloitte, KPMG and PricewaterhouseCoopers [PwC]) was competitive and resilient enough to maintain high quality standards.
It added that its decision came amid growing concern about statutory audits, in particular following the collapse of Carillion and the criticism of those charged with reviewing its books.
CMA chairman Andrew Tyrie said: “If the many critics of the audit process are right, it is not just the companies which buy audits that lose out; it is the millions of people dependent on savings, pension funds and other investments in those companies whose audits may be defective.
“Sir John Kingman’s independent review of the regulator is a big step in the right direction. And the CMA will now examine the market carefully to establish what contribution more effective competition could make to improving audit quality.”
CMA chief executive Andrea Coscelli also commented: “High quality audit work underpins a successful economy and benefits us all. Given the in-depth thinking already done by the CMA and the Competition Commission before it, we plan to move swiftly and to issue our provisional findings before Christmas.”
The CMA’s market study will examine 3 main areas:
- Choice and switching. “Changes put in place by the Competition Commission appear to have strengthened competition between the big four firms – Deloitte, KPMG, E&Y and PwC – but the largest UK companies still turn almost exclusively to one of them when selecting an auditor to review their books,” the CMA said.
- Resilience. The market study will examine what the role of the big four firms means for resilience – the risk being that each of the big four auditors is “too big to fail”, potentially threatening long-term competition.
- Incentives. “Companies, rather than their investors, pick their own auditor. The CMA’s work will examine concerns that this might result in a lack of incentive to produce challenging performance reviews,” the CMS said.
If the CMA finds evidence that the market is not working well after examining these areas, it will scrutinise all proposals for tackling them.
The CMA has written to the government about its market study and the possible need for legislation to implement its findings and those of the independent review of the Financial Reporting Council (FRC) led by Sir John Kingman.
