Accountancy firms face an overhaul to the way they conduct audits under proposals by the Competition and Markets Authority (CMA), the UK’s competition watchdog.

The CMA wants to separate audits and consulting services, as well as ensure closer scrutiny of auditor appointments.

It has also proposed there should be a greater choice of auditors to encourage competition.

According to the CMA, the so-called ‘Big Four’ auditors – Deloitte, KPMG, PwC and EY – conduct 97% of audits for the biggest companies.

Commenting on the audit reforms, CMA Chairman Andrew Tyrie said:

“Addressing the deep-seated problems in the audit market is now long overdue. Most people will never read an auditor’s opinion on a company’s accounts. But tens of millions of people depend on robust and high-quality audits.

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“If a company’s books aren’t properly examined, people’s jobs, pensions or savings can be at risk.”

The CMA’s findings come after a market study in October. It plans to release an updated paper by 21 January 2019 following further consultation.

“The CMA will now consult on a number of proposals for robust reform,” continued Tyrie. “These intractable problems may take some years to sort out.

“If it turns out that the proposals are not far-reaching enough, the CMA will persist until the problems are addressed.”

The CMA also found that 75% of revenue generated by the Big Four firms comes from other services, such as consulting. It warned that this ‘dilutes the quality’ of audits.

“Watershed moment”

Commenting on the CMA audit proposals for consultation in a statement, Kevin Ellis, chairman and senior partner of PwC UK, said:

“This is a comprehensive package of proposed interventions from the Competition and Markets Authority. We recognise it is time for change and a watershed moment for the audit sector.

“Audit quality must be front and centre of any reform. We support measures which strengthen audit quality, boost public confidence and encourage more choice in the market.

“The proposals will require careful and wide consultation in order to deliver practical remedies which serve the best interests of shareholders, companies and society at large. We look forward to seeing the CMA’s report to better understand its findings and recommendations.

“The UK has a world leading professional services sector and it is important that the CMA,  Kingman and other reviews lead to changes which further strengthen confidence and trust in the UK as a place to do business.”

CMA audit reforms only address some concerns

The CMA acknowledged that its proposed audit reforms only address some of the concerns in the sector, calling attention to the independent review by Sir John Kingman, which found shortcoming of the current audit regulator.

CMA chief executive Andrea Coscelli said: “We have moved fast to come up with a comprehensive package of proposals for legislation, which we will now consult on.

“Successful reform of the audit market will require legislation, in combination with planned improvements to regulation as recommended by Sir John Kingman.”

Karen Holden, founder of A City Law Firm, told Verdict that the CMA audit reforms will be a “welcome move for most”, particularly in light of “high profile failings and concerns surrounding conflicts of interest facing the auditing sector.”

Earlier this year construction company Carillion collapsed as a result of auditing failures.

“It is fundamental that auditors have autonomy since they are one of the last safeguards for stakeholders in holding companies and their directors to account,” added Holden.

“To some extent or other we actually all rely on the accuracy and accountability of auditors, be this to protect our pension funds, investments, jobs, businesses or suppliers.

“Whilst it is yet to be seen how in practice today’s decision will be implemented, it seems that a common sense approach has been adopted. It is hoped that this decision will go some way to restore the reputation and reliability of audits.”

Read more: Vetting auditors’ top appointments is not the answer to restoring public confidence