If you can’t trust the auditors, who can you trust? The question has dominated Britain’s audit profession since the financial crash — and with ever greater urgency after the collapse of the outsourcer Carillion and a slew of accounting scandals. Without trust in companies’ financial accounts, there can be no trust in business. The issue is particularly acute at a time when business is trying to move beyond the pure pursuit of shareholder value. The industry cannot be held to account for every scandal, but its oversight and standards have too often fallen short.
At the heart of the concerns have been the Big Four accounting firms who have enjoyed a near monopoly in auditing the largest listed companies with a market share of 97 per cent. Britain’s competition watchdog, the Competition and Markets Authority, finally laid out its remedies in April. The election has delayed a government decision on the plans — one of many areas of policy that has fallen victim to the political impasse at Westminster. The Big Four are doing their best to head off sweeping structural change. It is time for action. Reform is long overdue.
The thrust of the remedies is threefold: to reduce the potential conflict of interest between audit and advisory divisions; to encourage greater competition from challenger firms; and to improve the quality of audit in general. Under the current system, accountancy firms are able to share the profits from their consultancy activities with the audit division, a practice that in effect allows the more profitable consulting work to cross-subsidise less lucrative audits.