The Future of Audit Contents

7Competition, choice and resilience

189.This chapter considers the related issues of competition, choice and resilience in the UK’s statutory audit market of the FTSE 350 companies. The combination of a lack of choice through market concentration and a lack of challengers to compete with established audit companies together undermine the resilience of the FTSE 350 audit market.

Levels of competition and choice in the UK audit market

190.The domination by the Big Four of the FTSE 350 statutory audit market is well established and has increased in recent years:327

Concentration of the FTSE 100 and FTSE 250 Audit Market 2013 to 2017

Source: FRC, Key Facts and Trends in the Accountancy Profession, (July 2018), p 50.

Currently, only one FTSE 100 audit is carried out be a non-Big Four company (BDO), while only seven FTSE 250 audits are carried out by challenger firms (Grant Thornton and BDO).328

The dominance of the Big Four audit firms is also reflected in their share of fees:

Audit Firm Shares of FTSE 350 Audit Fee

Source: CMA, CMA, Statutory Audit Services Market Study: Update Paper, (December 2018), p 23.

And their total income compared to their nearest rivals:

UK Fee Income of the Largest Accountancy Firms, Year Ended 2017

Source: House of Commons Libraray, Company Audits: Problems and Solutions, (January 2019), p 9.

191.The size of the gap between the Big Four and their nearest rivals was underlined by the announcement in November 2018 that BDO is to merge with Moore Stephens to become the UK’s fifth biggest audit firm. Despite the merger between the sixth and tenth biggest audit firms in terms of total fee income,329 the new firm would still only be about 30 per cent of the size of KMPG, the smallest of the Big Four firms in terms of its total fee income.330

192.Choice appears to be the preserve of the Big Four for all but one of FTSE 100 audits and almost all FTSE 250 audits. But that choice is restricted further because audit firms are prohibited from carrying out audits if they carry out certain non-audit services or pass a threshold of providing other non-audit services.331 That means that when companies retender their audits (every ten years), the choice may be three firms and when they have to rotate auditors (every 20 years), the choice may be only two firms.332 The Secretary of State agreed that only having four companies to carry out the majority of audits in the FTSE 350 did not represent “a high degree of competition”.333

Why are challenger firms not taking on more FTSE 350 clients?

193.Previous attempts to open up the UK’s FTSE 350 audit market do not appear to have broken down the barriers facing challenger firms. The inability or reluctance of non-Big Four challenger firms to take on more FTSE 350 clients was underlined by the decision of Grant Thornton in March 2018 to stop bidding for such clients altogether.334

194.On the demand side, challenger firms have a much lower bid success rate (20 per cent) compared to the Big Four (35 per cent) when bidding for FTSE 350 audits. This is due partly to a perceived concern that challenger firms lack the capability to audit the largest, most complex companies, especially those at the top end of the FTSE 350.335 Challenger firms told us that they thought they did have the ability to carry out more FTSE 350 audits.336 This can lead to a ‘chicken and egg’ problem for challenger firms in that they are frequently ruled out of tenders on the basis that they lack experience that can only be gained through carrying out such audits.337 On the supply side, challenger firms are often reluctant to tender for FTSE 350 audits because of high tender costs,338 and their limited success, plus the greater regulatory, financial and reputational risk involved in auditing such companies.339 There are also difficulties involved in scaling up an audit business to take on more complex clients, such as attracting audit partners from the Big Four or investing in appropriate IT systems. The CMA therefore concluded that a general reluctance to bid for such work was “a rational response to their perception of the return on investment they can expect”.340

The CMA’s market study into the statutory audit market

195.In its market case study, the CMA included a major focus on choice, competition and resilience, and, in particular the barriers facing the challenger firms entering the FTSE 350 audit market.341 The CMA settled on several preferred remedies to address these issues:

We consider each of these in turn.

Mandatory joint audits

196.The CMA examined joint and shared audits and peer reviews, which are explained in the box below:

Mandatory Joint Audits342

Shared Audits

Peer Review

A mandatory joint audit requires two audit firms to sign off on the accounts of their audit client.

Responsibility for the audit opinion, and audit liability, would rest with both auditors.

One audit firm (the statutory auditor) takes overall control, responsibility and liability for the audit.

Another audit firm supports the statutory auditor on certain aspects of the audit.

An independent audit firm (not the company’s statutory auditor) reviews the audit file and assesses the accuracy of the audit opinion before it is signed off by the statutory auditor.

197.The CMA supported mandatory joint audits, involving a Big Four and a challenger firm, because it believed that they were more likely to reduce the barriers faced by the challenger firms to audit large, complex companies. It would do this by allowing them to develop the required expertise and experience and would lead, in the medium term, to improvements in the quality and capability of the challenger firms. This would lead to stronger competition and deliver improved market resilience, because larger challenger firms would be able to take on more complex audits and those of a current Big Four audit firm if it failed.344 The CMA noted that the implementation of mandatory joints audits would require the regulator to set out how the regime would operate and then oversee the Audit Committees’ implementation of it. It proposed that joint audits should at least apply to FTSE 350 companies.345

198.The CMA decided not to support shared audits,346 although we found some support for them.347 It feared that they would lead to Challenger firms being subordinate to Big Four statutory auditors–with the Big Four firm dictating how the audit is carried out.348 As one witness told us: “You could divide up the work, but then you would always have the issue that you would still always have a junior player, so it would not necessarily open up the market”.349 While we generally accept this argument, we acknowledge that one key advantage of shared audits is the sharing of unlimited liability, which can act as a deterrent for some smaller challenger firms.350 We suggest that if unlimited liability continues to be seen as a bar to challenger firms, the CMA should consider how to remove this barrier. The CMA thought further consideration could be given to the use of peer reviews to improve quality by introducing an additional, independent quality check. However, it did not see them as a mechanism to give challenger firms enough experience to become more competitive in tendering for the audits of large companies.351 We agree.

199.The evidence we received and submissions to the CMA indicated that a wide range of stakeholders, including the Big Four and FTSE 350 companies, were either against joint audits,352 or had significant concerns about implementing them.353 However, there were a number of other stakeholders, including Challenger firms, who supported their use,354 some of whom thought they could be used in conjunction with a market cap,355 or who thought that they should be at least considered.356

200.The question of whether joint audits would deliver higher or lower quality was key to much of the debate around their utility. The CMA concluded that the evidence was mixed.357 This reflects the evidence we heard. For instance, David Sproul of Deloitte, told us that there was no evidence that joint audits improved quality,358 while others warned that quality might suffer because responsibility could be diluted,359 with audit issues “falling through the gaps”.360 Others argued that they would be less efficient, slower and would duplicate work.361 However, Mazars, who deliver joint audits in France, thought that they could improve quality because two auditors could review each other’s work,362 and cited evidence that joint audits had delivered quality in France.363 In terms of the independence of auditors, the CMA thought that joint auditors would increase professional scepticism by reviewing each other’s work,364 while Vinita Mithani thought the opposite would be true because joint auditors might vie for the favour of the company’s management.365

201.On balance we believe that joint audits may lead to marginal improvements in audit quality and that if proper checks are put in place, such as effective communication between the joint auditors and regulatory monitoring, they will not lead to a decline in audit quality. Either way, the quality debate, important though it is, misses the key point. The main reason for introducing joint audits in the UK is not to improve quality. It is to provide more choice and resilience in the FSTE 350 market by allowing challenger firms to work alongside the Big Four and to gain the necessary experience to carry out more complex audits.366 In addition, building up the capacity of challengers would enable them to pick up the work of a failed Big Four firm.367

202.There was a consensus amongst witnesses that the introduction of joint audits would lead to an increase in fees, though there was disagreement as to how much this would be.368 ICAEW, for instance, thought that joint audits would inevitably be more expensive.369 Mazars, however, suggested that for the bigger audits there might be little cost difference and for others the cost differential with a single audit was between 10 and 28 percent.370 The CMA thought that this could be as much as 50 per cent, but probably more likely to be up to 20 per cent.371 We accept that joint audits might cost significantly more. However, we believe that the extra cost can be justified if the use of joint audits, especially for FTSE 100 companies, allows more choice and competition, improves standards and helps deliver greater resilience.

203.Several stakeholders also argued that joint audits might lead to an unequal relationship between Big Four auditors and challenger firms, with the former doing more “heavy lifting” than their smaller counterparts, on the more complex aspects of the audit.372 Other witnesses similarly argued that challenger firms could not build up the expertise to take part in joint audits of complex global companies, such as BP.373 ICAEW argued that one way of allowing challenger firms to build up the technology and expertise to carry out more complex audits was the use of its preferred option a market cap which would allow challengers to build up a fee base to invest in such capacity.374 The mid-tier challengers told us that they were ready to take up audits in the FTSE 250 and the FTSE 100, apart from the top 30 or so companies,375 and that entry into this market would allow them to invest in technology and people to expand their capabilities to take on more complex audits.376

204.We acknowledge that the regulator would need to carefully design and implement the rules on joint audits to ensure that challenger firms are afforded the opportunity to gain experience from working on the complex aspects of a big audit. The FRC told us that it could produce a feasibility report for the CMA to explore these sorts of issues.377 We agree, as we argue below, that a market cap would allow challengers to develop a fee base from the less challenging FTSE 100 and 250 audits. However, if challengers were unable to carry out the bigger audits, they would be excluded from higher audit revenues, and so the dominance of the Big Four would remain. The argument that challenger firms cannot deliver complex audits because they have not carried them out in the past is circular, and in fact makes the argument for joint audits to break that circle.378 Otherwise, without developing more capacity in the upper reaches of the FTSE 100 we will continue to have minimal choice, an absence of competitive pressures to drive quality and continuing concerns about the impact that a Big Four failure might have.

205.We share the reservations of many about the utility and impact of joint audits but believe that they have a role to play in increasing the resilience of the market in the medium term. We recommend that joint audits should be piloted in the upper reaches of the FTSE 100 in conjunction with our preferred option of a market cap for the rest of the FTSE 350, which is discussed below. Such audits should include a Big Four and a challenger firm; it should not include two Big Four firms. The new regulator should recommend joint audits where it believes challengers have not yet developed the resources and skills to take on the most complex audits alone but where, working alongside a Big Four firm, they would not affect audit quality. The regulator should monitor the quality of these pilots carefully and draw lessons from them to inform debates on which mechanisms are the most likely to increase competition and choice without damaging quality. Finally, we recommend that if unlimited liability is a significant deterrent to the challenger firms auditing the largest and most complex companies, the CMA should consider how to remove this barrier.

Auditing of banks

206.The CMA argued that in the case of banks, joint audits might be carried out by two Big Four auditors, owing to their complexity and size. We did not specifically consider the auditing of banks but recognise the case for treating them as a special category in view of the dire consequences of their failure.379 On this basis, further consideration is warranted and might include several options. For example, bank audits could be peer reviewed by the new regulator, the Audit, Reporting and Governance Authority (ARGA).380 Alternatively, ARGA could carry out enhanced audit quality reviews (AQRs), or real-time inspections of bank audits. Others have suggested that there should be a statutory auditor for the financial whole financial sector.381 We believe that the Government, perhaps with ARGA and the Prudential Regulation Authority, should explore this further. We recommend that because of their strategic importance the Government should examine the auditing of banks to explore whether additional safeguards are required in this sector.

A market cap

207.The CMA’s Update paper proposed a market cap as a potential alternative to its preferred mandatory joint audit remedy. The aim of a market cap would be similar to those for joint audits, namely to help challenger firms compete with the Big Four, thereby increasing choice, competition and resilience. The underlying principle of the cap would be to temporarily shield challenger firms from competition with the Big Four, so that they could achieve greater scale and experience and in the longer term become more effective competitors for the audit of large companies.382 Though the CMA argued that a market cap could be imposed on audits of all Public Interest Entities (PIEs), it thought that they should be applied to FTSE 350 companies in the first instance. They noted that it would also be possible to impose multiple caps on various segments of the market, based on company size or on the industry in which they operated.383 The CMA thought that a market cap was more likely than joint audits to lead to short-term risks to quality and competition.384

208.We found that there was more support for a market cap than for joint audits,385 most notably amongst the Big Four.386 KPMG, Deloitte and PwC told us that they could envisage a transitional market cap delivering 75 audits in the FTSE 350 in the near term.387 Many of the challenger firms also supported a market cap,388 and several supported it being used in conjunction with either joint, or shared audits,389 though Mazars preferred joints audits over a market cap.390 Several challenger firms told us that if a market cap was introduced they were already in a position to take up some FTSE 350 audits, if not the bigger companies in the FTSE 100.391 Michael Izza also favoured a segmented market cap, and one which ensured that Challenger firms were given a proportion of audits across the FTSE 350. Several investors also supported the use of a market cap if it was introduced progressively and with safeguards.392

209.However, opponents and proponents raised several concerns about their implementation, including:

210.The introduction of a market cap would be novel. However, there is a general acceptance that the current level of market concentration is unhealthy and needs to be addressed. As noted in our introduction, previous attempts at addressing this have not succeeded. We therefore believe that a market cap should be introduced.

211.We agree that a market cap must not lead to a deterioration in audit quality and we believe that this can be avoided if the cap is implemented and monitored carefully by the regulator and if, initially at least, joint audits were used only for the most complex audits, as recommended above. Avoiding the ‘cherry picking’ of the most lucrative clients by the Big Four is key. If this is not addressed, it is questionable whether the divide between the Big Four and the challengers will narrow, or if the challengers can build the revenue streams required to develop their capability and capacity to bid for more FTSE 350 audits. We therefore believe that a segmented market cap, offering a percentage of audits across both the FTSE 100 and FTSE 250, alongside piloted joint audits for more complex audits, will ensure that challenger firms can build up both their revenue base and their experience of delivering the full range of audits.

212.We acknowledge that initially a market cap might reduce choice for some audit committees, if Big Four firms are ruled out on reaching their threshold. However, such choice is already heavily constrained and potentially vulnerable to the Big Four becoming the Big Three. We also believe that it is possible for the regulator to design a system around the market cap and joint audits that is flexible enough to avoid significant choice and quality concerns. For instance, if one of the Big Four had reached its threshold for FTSE 100 audits it might be able to bid for such an audit if was done jointly with a challenger firm.

213.While acknowledging that there are short-term risks to introducing a market cap, we believe that on balance that they are outweighed by the long-term benefits of a more competitive and resilient audit market. We are confident that if the regulator designs, implements and monitors the market cap carefully these risks can be minimised. We recommend that the CMA draws up detailed proposals for the introduction of a segmented market cap offering challenger firms the chance to take up a proportion of audits across the FTSE 350. This should be done on the basis that each firm should have an individual cap to avoid one of the Big Four keeping all of its clients and remaining dominant. We recommend that the CMA develops this proposal together with a pilot of joint audits in the first instance to allow challenger firms to take on some of the more complex FTSE 100 audits.

Resilience measures

214.The Big Four’s domination of the FTSE 350 audit market has threatened its overall resilience. If one of the Big Four failed it would leave only three remaining large players, and if challenger firms did not have the capacity to take on Big Four audits at short notice, it would curtail choice for some of the more complex FTSE 100 audits.401 This could also have the perverse effect of the regulator being reluctant to take action against the Big Four, if that action, such as a large fine, might drive them out of the FTSE 350 market.402 Most audit stakeholders, including the Big Four, accepted that the resilience of the FTSE 350 audit market was a key issue.403 They accepted that whilst the risk was small, the failure of one of the large audit firms could have a negative impact on audit quality and therefore the resilience of the market needed to be ensured.404

215.To address this, the CMA recommended that further consideration should be given to a remedy that protected against the negative effects of further concentration in the audit market, especially if the Big Four becomes the Big Three. The CMA noted that at its core, such a remedy would ensure that the audit clients and staff of a failing Big Four firm were not transferred to another Big Four.405 The CMA accepted that such a remedy would be difficult to design and for the regulator to implement and would have to consider issues such as: incentivising staff of a distressed audit firm not to join another Big Four firm; avoiding moral hazards, such as ‘too big to fail’ (e.g. bail-outs or a lessening of regulatory oversight and use of sanctions); and the powers needed by the regulator to ensure resilience.406

216.The Big Four argued that resilience remedies need to be considered alongside the CMA’s other remedies, and suggested that dismantling multidisciplinary audit firms, through an operational or structural split, would reduce market resilience by making such firms more vulnerable to market failure.407 We are unconvinced by this argument. The best way of ensuring resilience is to ensure that there are more audit firms that can carry out FTSE 100 and FTSE 350 audits, a view shared by challenger firms,408 investors,409 and other stakeholders.410 If the Big Four turned into Six, Eight or Twelve that would allow a proper market to function whereby if an audit firm failed there would competition for its work to be picked up. The argument that audit firms are more viable if they are allowed to offer non-audit services is an admission of defeat: we believe that audit should be able to stand on its own two feet.

217.We recommend that the CMA works with the regulator to draw up proposals to mitigate the consequences of an audit market failure, especially if it involved one of the Big Four. However, we strongly believe that the CMA should prioritise remedies that enable more challenger firms to enter the FTSE 350 audit market and develop their ability to undertake the full range of audits. While acknowledging that there are short-term risks to introducing a market cap, we believe that on balance that they are outweighed by the long-term benefits of a more competitive and resilient audit market. We are confident that if the regulator designs, implements and monitors the market cap carefully these risks can be minimised. We recommend that the CMA draws up detailed proposals for the introduction of a segmented market cap offering challenger firms the chance to take up a proportion of audits across the FTSE 350. This should be done on the basis that each firm should have an individual cap to avoid one of the Big Four keeping all of its clients and remaining dominant. We recommend that the CMA develops this proposal together with a pilot of joint audits in the first instance to allow challenger firms to take on some of the more complex FTSE 100 audits.

327 The concentration of the FTSE 350 audit market amongst the Big Four has been a feature of the market for some time. The Competition Commission’s market investigation into the audit market published in 2014, indicated that market concentration in the FTSE 350 audit market amongst the Big Four between 2002 and 2010 in terms of the annual share of audit fees was almost 100 per cent. See: Competition Commission, Statutory Audit Services Market Investigation: Descriptive Statistics, (2012), p 4.

328 FRC, Key Facts and Trends in the Accountancy Profession, (July 2018), p 47.

329 At year-end 2017, BDO had a total fee income of £456mn and Moore Stephens a total fee income of £120mn. See: FRC, Key Facts and Trends in the Accountancy Profession, (July 2018), p 39; Times, Mid-size rivals put on bulk to fight Big Four accountants, (November 2018).

330 Financial Times, BDO set to become UK’s fifth-largest accountancy firm, (25 November 2018).

331 Financial Times, An illusion of choice: the conflicts that mire the audit world, (August 2018).

332 SKY News suggested that for Lloyds Bank, the choice was one, because “conflicts involving the other so-called ‘big four’ accountancy firms have left [Deloitte] as the only viable option”. See: Sky News, Big Four conflicts leave Lloyds banking on Deloitte as next auditor, (August 2018). See also: Financial Times, Lloyds’ pick of new auditor after 153 years is no choice at all, (November 2018); Times, Lloyds Bank in dilemma over auditing conflict, (August 2018). This has been a long-running concern. See: House of Lords Economic Affairs Select Committee, Auditors: Market concentration and their role, (HL Paper 119; March 2011), pp 12. They concluded: “All witnesses fear the real possibility that one of the Big Four might withdraw leaving a Big Three (or even a Big Two, in the bank audit market). We agree. Loss of one of the Big Four would restrict competition and choice to an unacceptable extent”.

333 Q668 (Rt Hon Greg Clark MP, Secretary of State, Department for Business, Energy and Industrial Strategy).

334 Financial Times, Grant Thornton exits audit market for big UK companies, (March 2018).

335 See Q111 (Steve Barber, Audit Committee Chair, AA plc); Q156 (Margaret Ewing, Nomination, Audit and Risk Chair, ITV). See also: CMA, Statutory audit services market study: Update paper, (18 December 2018), p 65.

336 See: Q194 (David Dunckley, Chief Executive Officer, Grant Thornton); Q195 (Scott Knight, Head of Audit, BDO); (Mazars LLP (FOA0025);

337 CMA, Statutory Audit Services Market Study: Update Paper, (December 2018), p 65.

338 See: Times, Big Four audit rivals priced out of market, (June 2018).

339 See: Q191 (David Dunckley, Chief Executive Officer, Grant Thornton); Q200 (Clive Stevens, Chairman, Association of Practising Accountants); Mazars LLP(FOA0025); Crowe U.K. LLP (FOA0010). See also: CMA, Statutory Audit Services Market Study: Update Paper, (December 2018), pp 69–70.

340 CMA, Statutory Audit Services Market Study: Update Paper, (December 2018), p 70.

341 CMA, Statutory Audit Market: Invitation to Comment, (October 2018), p 4

342 CMA, Statutory audit market: Invitation to comment, (October 2018), p 25–26.

344 CMA, Statutory Audit Services Market Study Update paper, (December 2018), p 99.

345 As above, p 101.

346 CMA, Statutory Audit Services Market Study Update paper, (December 2018), p 97.

347 Q335 (David Sproul, Senior Partner and Chief Executive Officer, Deloitte UK). He supported them in combination with a market cap. See also: Q345 (Kevin Ellis, Chairman and Senior Partner, PwC UK); Association of Chartered Certified Accountants (FOA0021); PwC UK (FOA0008); Association of Practising Accountants (FOA0012); Association of Chartered Certified Accountants (FOA0021); PwC LLP (FAO0029);

348 CMA, Statutory Audit Services Market Study Update paper, (December 2018), p 97. See also:

349 Q66 (Liz Murrall, Director, Stewardship and Reporting, The Investment Association). See also: Grant Thornton (FOA0029); Investment Association (FOA0014);

350 Q200 and Q321 (Clive Stevens, Chairman, Association of Practising Accountants). See also: Association of Practising Accountants (FOA0012);

351 CMA, Statutory audit services market study: Update paper, (18 December 2018), p 124 and p 127.

352 See: PwC UK(FOA0008); Association of Chartered Certified Accountants (FOA0021); ICAS (FOA0019); Vinita Mithani, Lecturer at Middlesex University Vinita Mithani (FOA0016); BDO, Invitation to Comment Paper, (November 2018); EY, Update paper: Statutory Audit Market, (January 2019); Steve Barber, Update Paper: Statutory Audit paper, (January 2019); Santander, Statutory audit market: Update paper, (January 2019); The 100 Group, Update Paper: Statutory Audit Market, (January 2019); Welcome Trust, Update Paper: Statutory Audit Market, (January 2019); Schroders, Update Paper: Statutory Audit Market, (January 2019); Royal Dutch Shell, Update Paper: Statutory Audit, (January 2019); Rothesay Life, Update Paper: Statutory Audit Market, (January 2019); Rio Tinto, Update Paper: Statutory Audit Market, (January 2019); RBS, Update Paper: Statutory Audit Market, (January 2019); Nationwide Building Society, Update Paper: Statutory Audit Market, (January 2019); Lloyds Banking Group, Update Paper: Statutory Audit Market, (January 2019); Johnson-Matthey Plc, Update Paper: Statutory Audit Market, (January 2019); HSBC, Update Paper: Statutory Audit Market, (January 2019); Institute of Chartered Secretaries and Administrators, Update Paper: Statutory Audit Market, (January 2019); IFAC, Update Paper: Statutory Audit Market, (January 2019); GC100, Update Paper: Statutory Audit Market, (January 2019); David Lindsell MA FCA, Update Paper: Statutory Audit Market, (January 2019); BT Group, Update Paper: Statutory Audit Market, (January 2019); Aviva, Update Paper: Statutory Audit Market, (January 2019); AstraZeneca, Update Paper: Statutory Audit Market, (January 2019); BP, Update Paper: Statutory Audit Market, (January 2019); CFA Institute, Update Paper: Statutory Audit Market, (January 2019); Morrisons, Update Paper: Statutory Audit Market, (January 2019); Smiths Group PLC, Update Paper: Statutory Audit Market, (January 2019); 3i, Update Paper: Statutory Audit Market, (January 2019); Association of British Insurers, Update Paper: Statutory Audit Market, (January 2019).

353 See: KPMG (FOA0009); Institute of Chartered Accountants in England & Wales (FOA0015); Investment Association (FOA0014); Deloitte, Update Paper: Statutory Audit Market, (January 2019);

354 See: Crowe U.K. LLP (FOA0010); Roliscon Ltd, Update Paper: Statutory Audit Market, (January 2019); Nexia, Smith & Williamson, Update Paper: Statutory Audit Market, (January 2019); Leathers LLP, Update Paper: Statutory Audit Market, (January 2019); Johnston-Carmichael LLP, Update Paper: Statutory Audit Market, (January 2019); Local Authority Pension Fund Forum, Update Paper: Statutory Audit Market, (January 2019); Professor Atul K. Shah (City University) et al., Update Paper: Statutory Audit Market, (January 2019). 38 Degrees thought that joint audits should be used for big businesses. 38 Degrees, Update Paper: Statutory Audit Market, (January 2019).

355 See: Mazars LLP Mazars LLP (FOA0025); Aberdeen Standard Investments (FOA0023); Chartered Accountants Ireland, Update Paper: Statutory Audit Market, (January 2019);

356 See: UKSA & ShareSoc (FOA0005); Rathbone Brothers PLC Rathbone Brothers Plc (FOA0026); RSM (FOA0030); Sarasin and Partners LLP, Update Paper: Statutory Audit Market, (January 2019); Hermes Investment Management, Update Paper: Statutory Audit Market, (January 2019); FRC, Update Paper: Statutory Audit Market, (January 2019)

357 CMA, Statutory Audit Services Market Study Update paper, (December 2018), p 99. Academic evidence suggests that joint audits have not increased quality. See: Dr Javed Siddiqui, ARE FOUR EYES BETTER THAN TWO? AN EXAMINATION OF RECENT EMPIRICAL EVIDENCE ON THE IMPACT OF JOINT AUDITS, University of Manchester, (January 2019); C Holm and F Thinggaard, ‘From joint to single audits – audit quality differences and auditor pairings. Accounting and Business Research’ (2018), vol 48, no:3, pp 321–344; C.M. Lesage, ‘Consequences of the Abandonment of Mandatory Joint Audit: An Empirical Study of Audit Costs and Audit Quality Effects’. European Accounting Review, (2017), vol 26, no 2, pp 311–339; N Ratzinger-Sackel et al., ‘What do we know about joint audits?’, ICAS, (2012).

358 Q334 (David Sproul, Senior Partner and Chief Executive Officer, Deloitte UK). See also: Q7 (Ilias Basioudis, Senior Lecturer in Financial Accounting and Auditing, Aston University Business School); Q7 (Vinita Mithani, Lecturer in Accounting, Department of Accounting and Finance, Middlesex University); Q72 (Liz Murrall, Director, Stewardship and Reporting, The Investment Association). See also: TheCityUK, Statutory audit services market study: update paper, (February 2019); Schroders, Statutory audit services market study: update paper, (February 2019).

359 See: 100 Group, Statutory audit services market study: update paper, (February 2019). See also: Mingcherng Deng et al., Do Joint Audits Improve or Impair Audit Quality?, Journal of Accounting Research, (2014). They noted that joint audits by one big firm and one small firm might impair audit quality, because it could induce a free–riding problem between audit firms and reduce audit evidence precision.

360 Q7 (Ilias Basioudis, Senior Lecturer in Financial Accounting and Auditing, Aston University Business School); Q71 (Liz Murrall, Director, Stewardship and Reporting, The Investment Association). See also: Deloitte, Statutory Audit Market – Invitation to Comment, (November 2018); PwC, Statutory Audit Market – Invitation to Comment, (November 2018); 100 Group, Statutory audit services market study: update paper, (February 2019); Schroders, Statutory audit services market study: update paper, (February 2019).

361 See: Steve Barber, Statutory audit market: Invitation to comment, (November 2018); RBS, Statutory audit market: Invitation to comment, (November 2018); HSBC, Statutory audit market: Invitation to comment, (November 2018); Kevin Parry, Statutory Audit Services Market Study Update paper, (February 2019); Santander, Statutory Audit Services Market Study Update paper, (February 2019);

362 Mazars LLP (FOA0025).

363 Q292 (Jac Berry, UK Head of Quality and Risk, Mazars).

364 CMA, Statutory Audit Services Market Study Update paper, (December 2018), p 99.

365 Q7 (Vinita Mithani, Lecturer in Accounting, Department of Accounting and Finance, Middlesex University). See also CFA Institute, Statutory Audit Service Market Study: Updated Paper, (February 2019).

366 CityAm, Joint audit could inject some competition and help avoid more failures like Carillion, (22 January 2019).

367 Mazars LLP (FOA0025).

368 See, for example: Q141 (Steve Barber, Audit Committee Chair, AA plc). See also: Q141 (Margaret Ewing, Nomination, Audit and Risk Chair, ITV); Q342 (Kevin Ellis, Chairman and Senior Partner, PwC UK); Q16 (Professor Christopher Humphrey, Professor of Accounting, Alliance Manchester Business School). See also: Deloitte, Statutory Audit Market – Invitation to Comment, (November 2018); KPMG, Statutory Audit Market – Invitation to Comment, (November 2018). See also: Financial Director, Joint audits: Do they add up?, (February 2017).

369 ICAEW, Statutory Audit Market – Invitation to Comment, (November 2018). See also: Schroders, Statutory audit services market study: update paper, (February 2019); HSBC, Statutory audit services market study: update paper, (February 2019). HSBC suggested that fees could increase between 30% and 100%.

370 Mazars, Statutory audit services market study, Update paper, 18 December 2018

371 CMA, Statutory Audit Services Market Study Update paper, (December 2018), p 99. It noted that some evidence suggested that audit fees could increase by 25–50 per cent, but thought on balance it would be less than 20 per cent.

372 Q329 (Bill Michael, UK Chairman and Senior Partner, KPMG). See also: See also: Mingcherng Deng et al., Do Joint Audits Improve or Impair Audit Quality?, Journal of Accounting Research, (2014).

373 See: Q142 (Margaret Ewing, Nomination, Audit and Risk Chair, ITV); Q141 (Steve Barber, Audit Committee Chair, AA plc). See also: Royal Shell, Statutory audit services market study: update paper, (February 2019); BP, Statutory audit services market study: update paper, (February 2019); BT, Statutory audit services market study: update paper, (February 2019).

374 Q586 (Michael Izza, Chief Executive, Institute of Chartered Accountants in England and Wales).

375 See: Q284 (David Dunckley, Chief Executive Officer, Grant Thornton); Q284 (Scott Knight, Head of Audit, BDO; Clive Stevens).

376 Q194 (David Dunckley, Chief Executive Officer, Grant Thornton)

377 Q584 (Stephen Haddrill, Chief Executive, Financial Reporting Council).

378 Mazars LLP (FOA0025).

379 The House of Lords Economic Affairs Committee, for example, thought that in view of the financial crisis (2007–2008) there needed to be closer regulatory supervision with the auditors of banks. This was because the lack of such supervision, “particularly in a period of looming financial crisis” had been a “dereliction of duty by both auditors and regulators”. House of Lords Economic Affairs Select Committee, Auditors: Market concentration and their role, (HL Paper 119; March 2011), pp 38–46. This importance of this was flagged in July 2018, by the Chief Executive of the Prudential Regulation Authority who said that he was concerned by the FRC’s finding that Big Four audits of banks had declined in quality. See: Financial Times, Top regulator ‘worried’ about Big Four audit quality, (July 2018); FRC, Big Four Audit Quality Review results decline, (June 2018); Treasury Select Committee, Oral evidence: The work of the Prudential Regulation Authority, (HC 704; July 2018), Q84-Q85.

380 Discussed in greater detail in Chapter 8 of this report. The Financial Reporting Council launched a consultation in December 2018 on updates to its Practice Note on The Audit of banks and Building Societies. The consultation closed on 12 March 2019. See: FRC, FRC issues revised auditing standard and consults on guidance for quality bank audits, (12 December 2018) and Times, Financial Reporting Council to lift quality of bank audits, (13 December 2018).

381 Prem Sikka et al., REFORMING THE AUDITING INDUSTRY, (December 2018), p 4.

382 CMA, Statutory Audit Services Market Study Update paper, (December 2018), p 102

383 As above, p 102.

384 As above, p 109.

385 See: BDO, Update Paper: Statutory Audit Market, (February 2019); Crowe UK LLP, Update Paper: Statutory Audit Market, (February 2019);

386 See: PwC UK KPMG LLP PwC UK (FOA0008); Deloitte, Update Paper: Statutory Audit Market, (February 2019);

387 Q335 (David Sproul, Senior Partner and Chief Executive Officer); Q322 (Bill Michael, UK Chairman and Senior Partner, KPMG); Q344 (Kevin Ellis, Chairman and Senior Partner, PwC UK). Deloitte thought that a market cap could be used in conjunction with shared audits.

388 BDO LLP (FOA0020).

389 See: Crowe, Statutory Audit Market - Invitation to Comment, (November 2018), p 2; Aberdeen Standard Investments, Update Paper: Statutory Audit Market, (February 2019); Chartered Accountants Ireland, Update Paper: Statutory Audit Market, (February 2019). Deloitte favoured the use of a market cap with shared audits. Deloitte, Update Paper: Statutory Audit Market, (February 2019).

390 Mazars LLP (FOA0025).

391 Q284 (David Dunckley, Chief Executive Officer, Grant Thornton); Q284 (Scott Knight, Head of Audit, BDO). See also: Times, Accounting rivals look forward to a more level playing field, (August 2018).

392 Aberdeen Standard Investments(FOA0023); Investment Association (FOA0014);

393 See: Q399 (David Sproul, Senior Partner and Chief Executive Officer); Q155 (Margaret Ewing, Nomination, Audit and Risk Chair, ITV); Q156 (Steve Barber, Audit Committee Chair, AA plc); Q18 (Ilias Basioudis, Senior Lecturer in Financial Accounting and Auditing, Aston University Business School); GC100, Statutory Audit Market: Update Paper, (February 2019), pp 5–6; KPMG, Statutory Audit Market: Invitation to Comment, (November 2018); EY, Statutory Audit Market: Invitation to Comment, (November 2018); CFA Institute, Statutory Audit Service Market Study: Updated Paper, (February 2019); Morrisons, Statutory Audit Service Market Study: Updated Paper, (February 2019); Nationwide Building Society, Statutory Audit Service Market Study: Updated Paper, (February 2019).

394 See: Q155 (Margaret Ewing, Nomination, Audit and Risk Chair, ITV); (Q355 (David Sproul, Senior Partner and Chief Executive Officer); ICAS Association of Chartered Certified Accountants (FOA0019); Rathbone Brothers PLC (FOA0026); Association of Chartered Certified Accountants (FOA0021); BP, Statutory Audit Service Market Study: Updated Paper, (February 2019); ICAS, Statutory Audit Service Market Study: Updated Paper, (February 2019); 3i, Statutory Audit Service Market Study: Updated Paper, (February 2019); AstraZeneca, Statutory Audit Service Market Study: Updated Paper, (February 2019); BT, Statutory Audit Service Market Study: Updated Paper, (February 2019); Kreston Reeves, Statutory Audit Services Market Study: Update Paper, (February 2019); Schroders, Statutory Audit Services Market Study: Update Paper, (February 2019).

395 See EY, Statutory Audit Market: Invitation to Comment, (November 2018); Investment Association, Statutory Audit Service Market Study: Updated Paper, (February 2019).

396 See: Q18 (Ilias Basioudis, Senior Lecturer in Financial Accounting and Auditing, Aston University Business School);

397 CMA, Statutory audit services market study: Update paper, (18 December 2018), p 103.

398 KPMG, Statutory Audit Market: Invitation to Comment, (November 2018).

399 KPMG, Statutory Audit Market: Invitation to Comment, (November 2018); PwC, Statutory Audit Market: Invitation to Comment, (November 2018); Smiths Group PLC, Statutory audit services market study: Update paper, (February 2019); BT, Statutory Audit Service Market Study: Updated Paper, (February 2019); The 100 Group, Statutory Audit Service Market Study: Updated Paper, (February 2019).

400 EY, Statutory Audit Market: Invitation to Comment, (November 2018).

401 CMA, Statutory Audit Services Market Study: Update Paper, (December 2018), p 71. The European Commission made the same point in their Green Paper on audit in the wake of the financial crisis (2007–2008). See European Commission, GREEN PAPER: Audit Policy: Lessons from the Crisis, Com(2010) 561, (October 2010), p 4 and p 16. See also: Times, One disaster can shrink Big Four accountants to three, (July 2018).

402 CMA, Statutory Audit Services Market Study: Update Paper, (December 2018), p 71..

403 See:Q381 (Bill Michael, UK Chairman and Senior Partner, KPMG); Q388 (Kevin Ellis, Chairman and Senior Partner, PwC UK); Q73 (Leon Kamhi, Head of Responsible Investment, Hermes Investment Management); CIMA (FOA0033); UKSA & ShareSoc (FOA0005); Crowe U.K. LLP (FOA0010); Sarasin & Partners LLP (FOA0024); Mazars LLP (FOA0025); Investment Association, Statutory Audit Services Market Study: Update Paper, (February 2019); Hermes, Statutory Audit Services Market Study: Update Paper, (February 2019); Kreston Reeves, Statutory Audit Services Market Study: Update Paper, (February 2019); Lloyds Banking Group Plc, Statutory Audit Services Market Study: Update Paper, (February 2019); Nationwide Building Society, Statutory Audit Service Market Study: Updated Paper, (February 2019); Nexia, Smith & Williamson, Statutory Audit Service Market Study: Updated Paper, (February 2019); Professor Atul Shah, Brian Little, Paul Moore, Professor Richard Murphy, Statutory Audit Service Market Study: Updated Paper, (February 2019); The 100 Group, Statutory Audit Service Market Study: Updated Paper, (February 2019). The Government also accepted that resilience was a key concern. See: Q687 (Alex Chisholm, Permanent Secretary, Department for Business, Energy and Industrial Strategy).

404 See: PwC, Statutory Audit Services Market Study: Update Paper, (February 2019); Deloitte, Statutory Audit Services Market Study: Update Paper, (February 2019); EY, Statutory Audit Services Market Study: Update Paper, (February 2019); KPMG, Statutory Audit Services Market Study: Update Paper, (February 2019).

405 CMA, Statutory Audit Services Market Study: Update Paper, (18 December 2018), p 113.

406 As above, p 114.

407 See: Q383 (David Sproul, Senior Partner and Chief Executive Officer, Deloitte UK); EY, Statutory Audit Services Market Study: Update Paper, (February 2019), p 3; Deloitte, Statutory Audit Services Market Study: Update Paper, (February 2019), p 7; KPMG, Statutory Audit Services Market Study: Update Paper, (February 2019), p 37; PwC, Statutory Audit Services Market Study: Update Paper, (February 2019), p 18–19. See also: ACCA, Statutory Audit Services Market Study: Update Paper, (February 2019), p 12.

408 See: BDO, Statutory Audit Services Market Study: Update Paper, (February 2019), pp 9–10; Grant Thornton, Statutory Audit Services Market Study: Update Paper, (February 2019);

409 Hermes Investment, Statutory Audit Services Market Study: Update Paper, (February 2019); Aberdeen Standard Investments, Statutory Audit Services Market Study: Update Paper, (February 2019), p 2; Investment Association, Statutory Audit Services Market Study: Update Paper, (February 2019), p 11.

410 Professor Atul K. Shah (et al.), Statutory Audit Services Market Study: Update Paper, (February 2019).



Published: 2 April 2019