CMA launches immediate review of audit sector in wake of Carillion criticism

A detailed study has launched by the Competition and Markets Authority (CMA) to examine concerns that the audit sector is not working well for the economy or investors.

As part of its review, the CMA will investigate whether the sector is competitive and resilient enough to maintain high quality standards.

The move comes amid growing concerns about statutory audits, in particular following the collapse of Carillion and the criticism of those charged with reviewing the organisation’s books, as well as recent poor results from reviews of audit quality.

The Financial Reporting Council (FRC) opened an investigation in relation to KPMG’s audit of the financial statements of the construction and services firm in January. The FRC investigation considered whether the auditor breached any relevant requirements, in particular the ethical and technical standards for auditors.

The CMA’s market study will examine three 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 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.

  • 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.
  • Should any evidence that the market is not working well be found after examining these areas, the CMA will scrutinise all proposals for tackling them.

    The CMA has written to the UK 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 led by Sir John Kingman.

    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 added: “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.”

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