Being able to do business with confidence means being able to trust the numbers.
This is what audit has traditionally done – provided independent assurance that a company’s financial statements are a “true and fair” representation of their financial position.
Unfortunately, there are now too many questions around the role of audit in high-profile corporate failures – of which Carillion is the latest. If you believe that trust in audit is vital, we must acknowledge that this trust is under threat.
We can start by recognising the needs of wider society, especially those with a stake in a business – not just investors but also employees, pensioners, suppliers and customers.
If the audit profession is falling short of their expectations, that is our problem, not theirs. We must respond to that need. It is no longer enough to blame it on an “expectation gap”; if there are deeper systemic problems, we must face them.
One area is market structure. No one denies that the audit market is currently dominated at the top end by the Big Four accountancy firms, as former business secretary Vince Cable helpfully pointed out in these pages yesterday. But if we take steps to change this, as critics have called for, we need to be aware that a “Big Five” is only one potential outcome. Get it wrong and there is a risk it becomes the “Big Three”.
We need to understand why there remains significant market concentration at the higher levels, and in particular why other audit firms are not scaling up to challenge them.
Is it the risk profile? Auditors carry unlimited liability, which may well dissuade smaller firms from taking on a Public Interest Entity audit.
Are the fees enough to make it worth smaller firms’ while taking on such risks? Or is the additional regulation that comes with auditing the UK’s largest businesses putting them off? The Financial Reporting Council has a vital role to play safeguarding audit standards, but it must be mindful of the impact of over-regulation on competition and choice.
It is important not to conflate problems with audit and the recent questions over Carillion with the activities of the accountancy profession as a whole. Our members advise over two million businesses every day, helping them plan, access finance, grow and manage costs, and avert disasters.
Nor is the profession standing still. Over the last few years, we have seen the revised Statutory Audit Directive and Regulation, increased assurance tools, more dialogue with clients, and the Audit Firm Governance Code, which is emulated around the world.
There is no shortage of people, including the Liberal Democrat leader, willing to articulate the problems with the audit market. That is not the same as finding a solution. Until we address the underlying issues dissuading smaller firms from playing a greater part in audit, we will be no closer to a cure.
The Competition and Markets Authority has not yet had a chance to review the effects of the remedies resulting from its last investigation. Once it does, there will be an opportunity to decide if still more needs to be done.
It would clearly be better to have more choice in the market, but leading a campaign to break up the Big Four will cause more problems in this crucial market than it can hope to solve.