Sunday 4 November 2018 1:07 pm

Mazars says joint audits and market caps are solution to audit sector woes

Mazars, the professional services firm which is France’s fifth-largest auditor, has weighed in on the under-fire sector’s future, calling for market share caps and joint audits to disrupt the dominance of the Big Four firms.

It is the first large audit firm to release its response to the Competition and Markets Authority (CMA), which is currently conducting a quickfire review of the UK’s audit sector.

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Mazars called on the CMA to cap the Big Four of Deloitte, EY, KPMG and PricewaterhouseCoopers to 80 per cent of the listed market, guaranteeing access to some of the most lucrative contracts for smaller challengers. Currently, the Big Four carry out 97 per cent of audits among FTSE 350 firms.

David Herbinet, Mazars’ global head of audit, told City A.M.: “The market has been static for so many years that audit committees and investors, and all those in that space, do not know firms outside the Big Four.”

In its response, the firm said: “The implementation of a cap to total audit market share, allied with a joint audit system, lies at the heart of meaningful reform.”

Read more: Competition watchdog launches investigation into audit sector

“The cap should reduce the Big 4 market share in both the FTSE 350 and the rest of the listed market to 80 per cent after five years with joint audit introduced at the upper end of the FTSE350,” it added. “Both solutions are tried and tested, and have the highest chance of delivering change where there is a significant concentration of total audit fees.”

Its call for joint audits chimes with the response of the Institute of Chartered Accountants in England and Wales (ICAEW), the industry body, which noted the apparent success of joint audits in the French market, and said: “There is nothing to suggest that this model is ineffective in France.”

Mazars has been calling for joint audits for years, but Herbinet said present tumult in the sector had re-opened the conversation around methods of reform.

“We are not waking up to this idea now, we’ve been saying it consistently… because we’ve always felt this was the most secure way, the most guaranteed way of delivering change in the market,” he said.

He said joint audit systems, in which two or more auditors produce a single audit report for which they carry shared liability, had “proved to be very effective” in France, which he described as “the least concentrated market of any major economy”.

Herbinet suggested that joint audits could help diversify the market exposing audit committees at the top firms – who currently almost always opt for a Big Four auditor – to smaller companies.

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“The market has been static for so many years that audit committees and investors, and all those in that space, do not know firms outside the Big Four,” he said. “You always have this approach that nobody can be blamed for picking the Big Four, even when things happen afterwards.”

“Joint audit enables UK PLCs to keep that safety belt with one of Big Four signing their accounts, but start to experience a new firm,” he added.