9Conclusion
260.The failures of audit exposed after the banking crisis eventually led to a competition inquiry and some modest reforms. Since then weak audits have contributed to several high-profile company failures and because they failed to identify issues these failures came as a surprise to workers, pension holders, suppliers and to some extent the Government. The high proportion of sub-standard audits and the continued domination of the Big Four together demonstrate that these reforms have proved totally ineffective in increasing competition and delivering acceptable quality of audits.
261.The failings of audit have direct consequences for companies, jobs and investors. It is unacceptable that after so many audit failures, so little action has been taken to improve the quality of audit. People are tired of hearing excuses for failure and are intolerant of blame being shifted from one set of well-paid people to another. As a result, the public and key stakeholders who rely on audits for essential information have become disillusioned with the reliability of audits and distrustful of the performance of directors who look after themselves whilst letting down their business. Radical change is needed. It will also be resisted, by the Big Four and others who fare well out of the current system. They must not be allowed to delay or block necessary change.
262.We welcome the Government’s commitment to implement audit reforms as quickly as possible. We have set out how the current reviews should be taken forward in a coherent way. Our proposals are intended to address problems of:
- Audit quality, by stronger regulation and much-needed clarity on the interaction between accounting standards and the law;
- Resilience, by increasing the capability of challenger firms through segmented market share caps and the piloting of joint audits;
- Conflicts of interest, by splitting audit and non-audit services, ending the renewal of contracts and introducing cooling off periods. This will help the culture to be tilted away from one of facilitation by a service provider to one of challenge by an inspector;
- Product usefulness, by encouraging the broadening of the scope of audits to provide more useful information to assist the efficient allocation of capital in the economy.
263.Our vision for audit is a positive one. The industry itself should grasp this opportunity to broaden and strengthen its product, under the guidance of the Brydon review, to make it more forward-looking and comprehensive and to rebuild trust that has been shaken badly. This will provide a more useful offering for investors and the public alike. It will also make a career in audit more varied, rewarding and ultimately more meaningful in its service to the public interest.
264.Our proposed reforms are pragmatic and designed to deliver solutions that prove to work the best. If they prove ineffective, the more radical full structural break-up of the Big Four should be pursued. As a package, they will help the UK take a lead internationally on audit quality, reduce risks of corporate failure and ultimately improve the competitiveness and resilience of the UK audit market. The Government should act without delay, to take a lead and mitigate the risk of further damaging corporate failures and audit embarrassments. We intend to call key players back to review progress as the reforms are implemented. Reviews are a good start; implementing their recommendations must follow.
Published: 2 April 2019