The UK’s competition watchdog has been encouraged to drive shareholder involvement in picking and overseeing company auditors, as it looks for ways to shake up the sector.
In their responses to the Competition and Markets Authority (CMA) review of the audit sector, two shareholder bodies – the UK Shareholders’ Association (UKSA) and UK Individual Shareholders’ Society (ShareSoc) – called for raised engagement with investors to monitor how company accounts are signed off.
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In a joint response, the UKSA and ShareSoc said all companies should have a “stakeholder group” which would assist the audit committee in procuring contracts, and “allow stakeholder oversight of the work of the external auditor”.
They encouraged top firms to look into “reverse marketing” strategies, including splitting audit contracts between firms, to “ encourage mid-tier audit practices to acquire the necessary breadth of resource and experience to carry out audits for them.”
Cliff Weight, director of ShareSoc, told City A.M.: “Audits and auditors are not serving the needs of individual investors. Far too often they fail to spot problems. A big shake-up is required with a proper procurement process answerable to shareholders via a shareholder group representing all shareholders.”
The comments arrive amid a furore at Patisserie Valerie, where shareholders voted through a rescue package despite upset over chairman Luke Johnson’s unwillingness to share some details of the company’s current financial issues – which may have been the product of fraudulent accounting. Investors have questioned how external auditor Grant Thornton missed a £40m black hole in the cafe chain’s accounts.
Responses to the CMA’s called for evidence have been trickling out over the past week, after it announced a rapid review of the sector. Audit ended up in regulators’ headlights after a series of high-profile scandals in the sector, including the collapse of construction firm Carillion.
Suggestions on how to break the grip of the Big Four – Deloitte, EY, KPMG and PricewaterhouseCoopers – have been mixed so far. Mid-size firm Mazars and industry body the Institute of Chartered Accountants in England and Wales have both put forward the case for the introduction of a joint audit system, and called on the CMA to look at capping the number of listed company contracts any firm can have.
EY, however, backed a shift to a more American-flavoured audit system, in which top executives are forced to take personal responsibility for the accuracy of their firms’ accounts.
Other responses released so far include the International Federation of Accountants (IFAC), a New York-based sector body. Claiming to provide an “international perspective” in its response, it urged regulators to examine strengthening the links between audit committees and shareholders to improve transparency.
It argued against direct break-up of the Big Four or splitting firms into audit-only and non-audit wings, saying to do was “likely to cause adverse outcomes”.