CIPFA warns on local government impact of audit shake up

18 Apr 19

The Competitions and Markets Authority’s proposals to partially break up the ‘big four’ accounting firms to increase competition “will have consequences” for local government, CIPFA has said.

The CMA suggested that the firms separate their audit practice from their consultancy work to mitigate against the loss of one of the big four.

It said: “Legislation is needed to address both the vulnerability of the industry to the loss of one of the big four, and the current inadequate choice and competition.”

EY, Deloitte, KPMG and PwC are the firms that make up the big four.

Diana Melville, CIPFA governance advisor, said: “While today’s report largely relates to private sector audit committees, improvements here will likely also drive improvements in the public sector.

“If adopted, the changes to the structure, delivery and oversight of external audit will have consequences for the audit of local authorities, meaning those responsible for its regulation, now and in the future, will need to adapt accordingly.”

The CMA said that the changes would require separate management of the big four’s audit work, including a new chief executive for the audit arm, separate financial statements for audit practice, an end to profit-sharing between audit and consultancy, and promotions and bonuses based on the quality of the audits.

It also suggested the firms should hire smaller “challenger” firms to carry out joint audits.

“Challenger firms should work alongside the big four in these joint audits and should be jointly liable for the results,” it said.

CMA chairman Andrew Tyrie said: “People’s livelihoods savings and pensions all depend on the auditors’ job being done to a high standard. But too many fall short – more than a quarter of big company audits are considered to be sub-standard by the regulator. This cannot be allowed to continue.”

Big four responses:

A KPMG spokesperson said:

“We believe that there is scope for our sector to further enhance the transparency, governance and performance management of our audit practices and whilst we need to study the proposals in detail, we welcome many aspects of the CMA’s recommendation to introduce increased separation.

An EY spokesperson said:

“The CMA proposals announced today risk the UK’s attractiveness for business. They represent a missed opportunity to create lasting change and make the UK the best and safest place to invest and work.”

Stephen Griggs, UK managing partner for audit at Deloitte, said:

“We will review their report to understand the details of how the measures will be implemented. However, we are concerned that some of their headline recommendations don’t meet the objectives on increased choice and competition and that our warnings on unintended consequences such as lower audit quality, damage to UK competitiveness, and weaker resilience of the sector have been ignored.”

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