Should the audit and consultancy arms of the Big Four firms be divided, as proposed by MPs?
YES, says Rachel Reeves MP, chair of the Business, Energy and Industrial Strategy Committee.
We have two major problems in the audit market today: a lack of competition and quality. The Big Four’s dominance has led to a precarious market which shuts out challengers and delivers audits that investors and the public cannot rely on.
How can we fix this? We need a tougher regulator to replace the passive and ineffective Financial Reporting Council. But we also need to tackle the conflict of interests that riddle the audit market.
For the big firms, audits are too often the route to milking the cash-cow of consultancy business. The client relationship, and the conflicts of interest which abound, undermine the professional scepticism needed to deliver reliable, high-quality audits.
Moving to an operational split could result in real independence. But if it doesn’t, we should not be afraid to move to a legal separation to create the culture necessary for quality audits. Businesses, investors, pension holders, and the public deserve nothing less.
NO, says Maggie McGhee, executive director of governance at ACCA.
The modern audit is highly complex. Changes to financial reporting standards mean that auditors are much more reliant on specialist knowledge – such as tax, pensions or valuations – than they were in the past.
Auditing standards require the audit firm to “buy in” this expertise to each audit where required, and most firms get such expertise from other parts of their own firm.
This is not only efficient, but means that the audit team know that they are relying on an expert with the same culture, and who shares in the profits (and losses) of the audit engagement.
This is vital, as it means the non-audit expert has a real financial interest in delivering the same high quality as the members of the audit team. While it is possible to buy expertise from third parties, this makes it difficult for the audit team to determine the quality.
Dividing the audit and consultancy arms of the Big Four firms will hinder access to the specialist expertise, which they need to audit complex multinational companies.