UK audit report: competition concentration concerns

frc-logo-370x229

Confidence in the quality of auditing is improving according to the UK’s Financial Reporting Council,  however there remains concerns about the level of concentration in the market which is dominated by four major firms.

The overview of auditing report is the first since becoming the country’s Competent Authority for audit under EU rules. Two years ago, the FRC said it commissioned YouGov to benchmark confidence in audit in the UK. That survey showed while those close to audit expressed confidence in the process, those more removed, including some investors, did not share the same level of confidence.

In a follow-up survey this year, the results showed that stakeholders have a clearer understanding of what audit is and a higher level of confidence in it. But recent corporate failures and the resulting increased public scrutiny of auditors, have undermined some of this progress.

Audit firms are seen as more independent and competing for audit engagements on quality grounds, but concern remains that the FTSE 350 audit market is concentrated across the Big Four firms. Smaller firms are perceived to struggle to match on skill level, resource and ability to bear the cost of tendering processes. The FRC said that large firms are beginning to improve the effectiveness and efficiency of audit through the transformative use of technology, which should prompt further competition on quality. This raises further concerns about the role of the auditor and how regulators and standard setters will be able to keep up.

The FRC’s audit monitoring results – and those of the professional bodies – show audit quality in the UK is improving. In 2015/16 the FRC assessed 77% of FTSE 350 audits it reviewed as requiring no more than limited improvements. The FRC considers that at least 90% of FTSE 350 audits should fall into that category by the end of its 2016/19 strategy.

EU regulatory changes have also bolstered confidence, the FRC  said. The recently adopted EU audit regulated introduced mandatory rotation and tightened rules around non-audit service provision. However, the study found that some fear the increased public and regulatory scrutiny could deter future talent from joining the profession, thus impacting long-term quality.

Responding to the referendum result which backed leaving the EU the FRC said the current regulatory framework would continue to apply initially. The report stated that, “We will pay close attention to the decisions now taken by the government and parliament, and continue to work in collaboration with our key stakeholders, particularly investors, business and the professionals we regulate, in order to ensure our work continues to support economic growth and the effective functioning of the capital markets. ”

The FRC has also published its annual report which outlines its financial position, achievements, and challenges last year. It also details the current 2016/19 strategy in accordance with new corporate governance principles and the FRC’s risk and future viability. Future actions for the next year outlined by the FRC include:

  • encouraging better reporting against the Stewardship Code by assessing the quality of signatory statements;
  • assessing the quality of viability reporting in the light of the 2014 UK Corporate Governance Code;
  • promoting the importance of establishing a company specific corporate culture to support long-term sustainable growth and
  • further improving audit quality.

Leave a Reply