Reforming the Audit Industry

ICAEW and our profession absolutely recognise the need for change. I am therefore pleased to see Professor Prem Sikka and his colleagues make a contribution to the debate with their report, 'Reforming the Audit Industry', published today. The report, commissioned by the Labour Party, builds on ideas which Prof. Sikka has advocated for many years.

He presents a large number of proposals - 49 in total - including the creation of five new criminal offences and three new public bodies. While I support many of his intentions, I believe some of his recommendations are likely to have unintended consequences, and would actually prove counter-productive to the aims of improving audit quality and increasing competition and choice in the market.

For example, a radical increase in auditor liability will not encourage more challenger firms to compete in the PIE audit market, and may even prompt market exit by some of the firms already there.

I also have concerns about the suggestion that audit committees should no longer have the power to appoint their own choice of auditor. That responsibility is a key component of the UK’s Corporate Governance structure, and removing it would raise questions of where liability and cost lie in the event of audit failure. I believe that we should be looking at practical measures to strengthen audit committees and their ability to monitor and challenge auditors.

Because it is so vital to business confidence, audit is currently subject to unprecedented scrutiny. Next week, we expect the publication of findings from the review of the FRC led by Sir John Kingman, and the market study of statutory audit services being conducted by the Competition & Markets Authority. We then look forward to the parliamentary inquiry into the future of audit, which will start next month.

These reviews are an opportunity for our profession – to define our role, to stay relevant and to regain trust. ICAEW will continue to support and engage with them at every opportunity.