Tuesday 13 November 2018 7:01 pm

The six big ideas that could fix auditing

With nearly all the major expected responses to the Competition and Markets Authority’s (CMA) probe into the audit sector released or leaked, consensus on how to fix the scandal-hit sector is scattered – and there’s no silver bullet.

Here are six suggestions the CMA has been sent by auditors, industry bodies, stakeholder groups and academics as it tries to fix audit, and investigates the dominance of the Big Four – Deloitte, EY, KPMG and PwC – who together hold 97 per cent of FTSE 350 audit contracts.

Read more: The audit sector faces a perfect storm

1. Set caps on contracts

What’s the idea? Limit the number of big contracts any single auditor can have, ensuring that a certain number of FTSE 350 audits are carried out by challengers.

Who supports it? Two mid-tier auditors, BDO and Mazars, have called for a cap. BDO suggested a rule that no firm could audit more than 60 FTSE 350 clients by 2023.

2. Introduce US-style rules

What’s the idea? Adopt something like the US’s Sarbanes-Oxley Act, which forces company bosses to take personal responsibility for mistakes in company accounts.

Who supports it? EY and Deloitte sounded the charge for law changes, with the former saying bosses should “play a greater role” in accurate reporting

3. Ditch non-audit extras

What’s the idea? Ban auditors from selling extras – such as tax advice or consultancy – to firms they already audit. Currently, fees for non-audit add-ons are capped to 70 per cent of the audit value.

Who supports it? KPMG announced last week it would stop selling extras to its FTSE 350 clients. Deloitte has also signalled support. The Association of Chartered Certified Accountants has suggested a two-year timeout on outgoing auditors selling extra services.

Read more: Deloitte calls for audit market cap and ban on selling extra services to audit clients

4. Have an independent body pick auditors

What’s the idea? Create a body that picks auditors on behalf of large clients, similar to the National Audit Office (NAO) – which fulfils the same role for the public sector.

Who supports it? Top mid-tier firm Grant Thornton has been calling for the creation of an independent body, pointing to the NAO and saying an “equivalent mechanism” for FTSE 250 audit choices “could have a positive effect”. Several others have opposed it.

5. Try joint audits

What’s the idea? Introduce a French-style system where two or more auditors produce a single audit report for which they carry shared liability.

Who supports it? Mazars and the Institute of Chartered Accountants in England and Wales have offered support for the change, with the latter saying: “There is nothing to suggest that this model is ineffective in France.”

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

6. Break up the Big Four

What’s the idea? Launch an old-school break-up, splitting the Big Four apart into audit and non-audit companies, to totally eliminate conflicts of interest and reduce market concentration. As all four are international, this would prompt severe logistical complexities.

Who supports it? A group of academics and audit experts suggested breaking apart the Big Four and then once again halving the audit-only firms created, forming a Little Eight. All other responses have opposed full breakup.