Thursday 8 July 2021 1:11 pm

Audit reforms: IoD call for caution in plans to break Big Four dominance

The government should approach its plans for an audit and corporate governance reform with greater caution, said the Institute of Directors (IoD). 

A government white paper aimed at breaking up the concentration of the Big Four auditing firms – Deloitte, PwC, KPMG and EY has stirred criticism from the business group, who said that the plans for shared audits should be tested further before being implemented. 

The auditing scandals, and subsequent collapses of companies like Thomas Cook, Carillion and BHS, have brought auditors under the microscope of the government.

The Government said last year that almost a third of audits inspected on the FTSE 350 were in need of improvement.    

The director of policy and corporate governance at the IoD, Dr Roger Barker, said the group supports the government’s aim to address recent failings in audit and governance. 

“However,” she said, “as firms look to focus on recovery as we come out of the pandemic, we feel that it is right that the proposals are phased in over a longer period of time than currently envisaged.”

Smaller audit firms

The government’s proposed rules would force large companies to use smaller auditor firms to conduct part of their annual audit once an audit comes up for tender.

This, Barker says, is a step into the unknown. 

Under the existing rules a tender must take place every 10 years, with a change in auditor at least every 20 years.

Barker said the IoD is particularly concerned about the willingness and capacity of smaller challenger audit firms to take on major audits in partnership with the Big Four.

The IoD also cautioned over the government’s plan to replace the accountancy watchdog, the Financial Reporting Council (FRC) with a new organisation, the Audit, Reporting and Governance Authority (ARGA).

It is expected that the new watchdog will have legal powers to force auditors and companies to resubmit their accounts without the need for court action.

“Whilst we welcome the creation of ARGA,” said Dr Barker “it must not cross the line into becoming a fully-fledged prudential regulator as established in the banking and financial sector.”

Business Secretary Kwasi Kwarteng launched the White Paper, entitled ‘Restoring trust in audit and corporate governance’, in March to tackle plans to improve corporate governance. He said at the time: “Restoring business confidence, but also people’s confidence in business, is crucial to repairing our economy and building back better from the pandemic.”

Responding to the White Paper the UK chair of audit at KPMG, Michelle Hinchliffe, said in a statement: “In order to drive real change, establishing ARGA, with broader responsibilities, will be key, as will the introduction of a new framework for internal controls reporting.” She also said: “given the scale of the proposed reform, significant implementation challenges remain.”

Listed companies

The listed company market also expressed concerns about the proposed reforms according to the research by accountancy firm PKF. The Canary Wharf based firm interviewed 23 director and found that while 73 per cent said reform was needed, the same proportion were doubtful that the reforms will encourage greater public trust in companies’ audited financial statements.

“To avoid the real possibility of the reforms doing more harm than good, the government has to be careful to get the balance right,” said Mark Ling, head of capital markets at PKF, “the regulations have to be proportionate to size and risk.

He continued: “The proposed reforms need to be rebalanced with the heaviest regulatory burden applying only where the risk of corporate failure is the most important and significant. A tier system of corporate reporting and governance in the listed market is the way forward.’’