On Monday, I was delighted to welcome the Chair of the Business, Energy and Industrial Strategy Select Committee, Rachel Reeves MP, to Chartered Accountants’ Hall to deliver a keynote speech on the future of audit. In the course of that, she announced that her committee would be conducting a further inquiry into the audit market, with public hearings starting in January.
Rachel did not mince her words; she declared the audit market ‘broken’, and was particularly scathing of the quality of audits undertaken by the biggest firms. She also repeated the criticisms of the regulators which emerged during the inquiry earlier in the year into the collapse of Carillion: sadly, ‘useless and toothless’ has become the politician’s favourite soundbite regarding the FRC.
Aware that some would question the need for another review when Kingman and the CMA have yet to report - let alone the investigation being led by Professor Prem Sikka for the Labour Party – she described this new inquiry as working towards the delivery of a ‘new landscape for audit’.
In response to questions from the audience, she defended the role of Parliament in ensuring that government does not just commission reviews, but actually follows through and implements their recommendations. She has a point.
I listened to Rachel’s speech with mixed feelings. I am not sure that I agree with her statement that the audit market is ‘broken’: in our recent submissions to the Kingman review and the CMA market study, we have been careful to portray the broader picture: we have said that ‘…as a whole the audit sector in the UK is working well and its customers are satisfied. It operates to rigorous professional and technical standards, and is recognised internationally as high calibre. Outside the FTSE 350, medium-sized companies and small businesses across the UK economy are served by thousands of audit-registered firms: competition is strong and quality is high’.
Also, we do not think it is helpful just to ‘write off’ the FRC, and our preference would be to retain it and reform it. But none of this is to argue for the status quo: recent high-profile failures in the listed audit market have damaged both public trust in accountancy and confidence in business. As a profession, we recognise the need for change.
Between them, Sir John Kingman and the CMA are now tackling underlying issues of regulation, quality and competition, and are scheduled to make recommendations before the end of the year. We have been arguing for some time that the natural follow-on to their work should be a fundamental examination of the role of audit itself: the expectations of investors and wider society have quite rightly increased in recent years, and we need to ensure that audit keeps pace.
To date, Rachel’s committee has rendered invaluable public service in scrutinising the issues and raising questions - and in particular, giving a voice to the other stakeholders affected by corporate collapse – not just shareholders, but employees, pension-holders, suppliers and customers. I hope that their new inquiry will build on the findings of the reviews now underway and I believe it has the potential to make an important contribution to the wider debate on the future of audit. We therefore welcome it, and we are ready to engage with the committee and support its work in any way.