Letter from Mazars LLP (ADT 21)
Mazars, the integrated international accountancy
organisation is pleased to submit its evidence to the Select Committee's
enquiry into the above issue.
Statutory audit is a fundamental element of
good governance. It provides assurance to shareholders on the
stewardship of their businesses and plays an important role in
ensuring confidence in the capital markets. We recognise the privilege
afforded to us as a firm in being registered to undertake statutory
audits and firmly believe that with this right comes the obligation
to help foster an open vibrant audit market that is responsive
to the needs of shareholders and the public interest more widely.
It would be helpful to review the scope of the
audit and whether this should be extended to encompass additional
assurance on areas such as risk and other aspects of narrative
reporting. We recognise, however, that support for such a move
will only be forthcoming if there is a strong level of support
from investors, regulators and others for the way in which the
core statutory audit is operating with regard, for example, to
how auditors report their findings and the structure of the audit
A MORE COMPETITIVE
A more open vibrant audit market, especially
for large listed companies, would better serve the public interest.
It would reduce the potential negative risks were one of the currently
dominant four firms to leave the market unexpectedly and would
also, in line with experience in other sectors, be likely to lead
to audit firms as a group being more innovative and more responsive
to shareholders' needs.
A STAGNANT AUDIT
Figures calculated from independent research
by Oxera and published by the Financial Reporting Council in 2006
indicate that a FTSE100 auditor can expect to remain in place,
on average, for a period of 48 years, with some having held office
for over a century, and those in the FTSE250 for 36 years., Oxera
also found that more than 70% of the FTSE 100 had not put their
audit out to tender for at least 15 years.
As the fifth progress report from the Financial
Reporting Council on the implementation of the recommendations
of its Market Participants Group highlights, the change to the
above state of affairs brought about by market-led initiatives
has been disappointing. It is now time to move on from a purely
To address the situation outlined above, we
believe reforms are needed to bring about, in particular, fair
and regular tendering; greater use of shared audits and an elimination
of restrictive covenants.
Large listed companies, as they constitute the
part of the market with both the greatest concentration and the
highest related systemic risk, should be expected to tender their
audits at regular intervals. Without this change, the opportunities
for a firm to increase their market share, whether one of the
existing leading players other than the Big 4 or a new entrant,
are extremely limited.
Consideration also needs to be given to the
arrangements to be made when audits are put out to tender. For
listed companies, these might involve publishing tenders to ensure
firms with the necessary capabilities are able to tender and having
a two stage process providing for the submission of a short document
at the first stage by a number of firms from which a shortlist
would be selected for the final presentation. Arrangements for
the independent oversight of tendering might also be helpful.
More radically, exploration for alternative
methods of appointment of auditors by, for instance, independent
shareholder panels could also be explored.
We strongly support considering how to actively
promote the involvement of more than one firm in the audit of
large listed groups. Innovative thinking is needed and the participation
of each of the shared auditors may take a number of different
forms. For example, one of the shared auditors may perform the
statutory audits for certain subsidiaries.
Joint audits, where two firms, take full joint
responsibility for the audit opinion offered, are a particular
form of shared audit. We believe there would be merit in requiring
leading banks in the UK to appoint joint auditors given the systemic
risk involved, the complexity of their operations and the inherent
subjectivity in their financial statements.
Our response to the detailed questions is set
out in the attached appendix.
24 September 2010
1. Why did auditing become so concentrated
on four global firms? For example, do economies of scale make
it too difficult for smaller firms to compete?
There are some economies of scale in relation
to the auditing of, for example, listed companies but they do
not explain the current levels of concentration in the audit market
for such companies especially at its upper end. Investment is
clearly needed in areas such as the provision of technical expertise,
training and development, the development and updating of audit
methodologies and the maintenance of quality control systems and
those related to independence. Significant investment has been
made by our firm and a number of other firms in this area and
thus the existence of some economies of scale cannot be used to
justify the dominance of the largest four firms. There may also
be some diseconomies of scale with respect to the largest firms
due to their significant overhead structures covering areas other
than those related to ensuring the quality of work undertaken.
Moreover, the geographical coverage of Mazars and the main networks
outside the Big 4 is sufficient to enable us to deal with the
vast majority of listed companies.
Auditing has become very concentrated amongst the
Big 4's global networks, each made up of a number of independent
firms, due, for instance, to the absorption many years ago of
regional firms by the leading players to create what at the time
were the eight largest nationwide firms in the UK; the subsequent
absorption of a number of mid-tier firms by the larger firms;
the merger of some of the larger firms themselves and finally
the collapse of Arthur Anderson in the wake of the failure of
Enron, leading to the emergence of the Big 4. On the demand side,
we understand that some investors and advisers have encouraged
companies to appoint a Big 4 firm when first joining the listed
market or subsequently. As large listed audits rarely come up
for tender, there has been ratchet effect on concentrationit
has steadily increased over time with little prospect of it reversing.
2. Does a lack of competition mean clients
are charged excessive fees?
Any views on whether clients are charged higher
fees than they would be in a more competitive market will tend
to be inherently subjective as audit fees will always be dependent
to some extent on companyspecific factors in a given accounting
period and over a period of years fees may vary due to both changes
in the internal environment of the company and in the external
marketplace, for example, as a result of the introduction of new
accounting standards or changes in company law. That said, it
would generally be expected that if there were more regular market
testing of fees through tenders and a greater choice of firm that
this would have an impact on audit fees.
3. Does a narrow field of competition affect
objectivity of advice provided?
We do not believe that the lack of competition
would lead any firm to offer advice that was other than professional.
4. Alternatively, does limited competition
make it easier for auditors to provide unwelcome advice to clients
who have relatively few choices as there is less scope to take
their business elsewhere?
We are not persuaded by any suggestion that
limited competition makes it easier for the auditor to provide
This and the previous question seek to elicit
views on the relationship, if any, between the objectivity of
advice and the degree of competition. We would suggest the enquiry
should also have regard to related issues such as the relationship
between the quality of service and the degree of innovation on
the one hand and the degree of concentration amongst the dominant
firms on the other.
5. What is the role of auditors and should
it be changed?
The current primary role of the auditor is to
express their view on whether the financial statements show a
true and fair view for the period covered by the audit. There
are additional responsibilities relating to checking whether the
financial statements are in accordance with the underlying accounting
records, to the director's report and to separate corporate governance
statements (with regards to the Transparency Directive).
There has been recent discussion on whether
the role of the auditor should be widened to encompass reporting,
in some form or other, on matters related to the principal risks
of the company and how they are being managed and also possibly
to some other aspects of narrative reporting, eg concerning discussions
of business performance and future prospects. We think these issues
should be fully explored, as should assurance on sustainability
issues, but it is vital that this be done by reference to which
reforms would best serve the public interest and, within that,
those of shareholders. Matters to be considered include which
areas of reporting should be covered by any additional assurance
requirements; what form of assurance would shareholders find to
be of real value, eg on the processes undertaken by the board
in the relevant area or on the outcomes: whether any additional
assurance should form part of the statutory audit or represent
a separate assignment; what would be the cost of providing the
additional assurance and whether the additional costs involved
are outweighed by the expected benefits?
Before considering extending the scope of the
audit it will also be essential to ensure that shareholders, including
in particular institutional shareholders, have full confidence
in the current core audit. This includes considering what is the
most helpful way for auditors to report their findings or, alternatively,
whether the audit committee should report on issues it and management
have discussed with the auditor who could confirm his or her agreement
with the disclosures made.
There would be merit in discussing whether there
is concern that the exercise of judgement in arriving at the audit
opinion on truth and fairness has been reduced in recent years
by greater emphasis on reporting and auditing standards.
6. Were auditors sufficiently sceptical when
auditing banks in the run-up to the financial crisis of 2008?
If not, was the lack of competition in auditing a contributory
We are not in a position to comment on this
issue as we do not have access to the necessary information. We
are, of course, aware that the FSA and FRC have published a paper
on this issue.
7. What, if anything, could auditors have
done to mitigate the banking crisis? How can auditors contribute
to better supervision of banks?
We consider that the introduction of joint audits
would provide additional audit assurance in respect of leading
banks and could be justified for them on the grounds of the systemic
risks involved in their operation; the complexity of their business
and the inherent subjectivity of their financial statements.
With regard to whether the auditors could have
helped to mitigate the banking crisis, we would observe that the
peak of the banking crisis occurred some months after the auditors
had reported on the last set of annual financial statements for
the leading banks and that the drying up of liquidity in the financial
markets had not happened for an extremely long period. Moreover,
when it manifested itself during the crisis it did so with relatively
8. How much information should bank auditors
share with the supervisory authorities and vice versa?
We support effective two-way liaison between
the regulators of banks and their auditors. Each has access to
information not available to the other and so gaining the full
picture requires consultation between them. In appropriate circumstances
it may be helpful also to involve the financial institution in
such dialogue although there is likely to be benefit in some discussions
taking place just between the regulator and auditors. Some of
these discussions would best be on a collective basis between
the regulators and the auditors of all the leading banks together
at which sector trends, their impact and the regulator's general
concerns could usefully be discussed. In addition, we would expect
appropriate one-on-one discussions between regulators and a bank's
auditors on bank-specific matters at appropriate times in the
year, eg after the conclusion of the audit though, if circumstances
merit it, meetings should naturally be held whenever necessary.
9. If need be, how could incentives to provide
objective and, in some cases unwelcome, advice to clients be strengthened?
We believe that fulfilling professional obligations
rather than incentives should be the primary driver for providing
high quality objective advice whether welcome or not.
10. Do conflicts of interest arise between
audit and consultancy roles? If so, how should they be avoided
Conflicts of interest can clearly arise between
audit and consultancy roles. Ethical standards require that the
audit partner should determine whether any proposed additional
services provides a conflict of interest, including a perception
of one, and that where this is the case the potential assignment
causing it should not be taken on unless appropriate safeguards
are first put in place. Notwithstanding the above, the provision
of certain services by the audit firm is prohibited.
11. Should more competition be introduced
into auditing? If so, how?
For the reasons discussed in the covering letter,
we strongly believe that it is essential in the public interest
for substantially greater competition to be introduced as a matter
It is now clear that voluntary initiatives in
this area are not achieving the desired results but if we thought
the necessary change could be achieve through, for example, a
robust code, eg the UK Corporate Governance Code, which was properly
monitored such an approach may have merit. The issue is a European
and global one, as well as a UK one and this needs to be taken
into account in determining the best way forward. We believe a
package of reforms will be needed and should probably include:
leading listed companies being expected
to put their audit out to tender at regular intervals;
fair tendering processes that have proper
regard to the capabilities of all appropriate firms; and
more use of shared auditors in the case
of leading listed companies, including joint audits for banks.
Other initiatives that it may be helpful to
explore include alternative appointment processes for auditors,
eg involving shareholder panels, and even limiting the number
of listed audits any one firm may hold.
12. Should the role of internal auditors
be enhanced and how should they interact with external auditors?
Internal audit has a vital role to play in the
overall assurance framework relating to large businesses. We believe
there would be merit in setting out in a little more detail in
the UK Code on Corporate Governance the role of the internal audit
function and appropriate reporting lines which emphasise its independence
from management. The primary reporting line should be to the chair
of the audit committee. We also consider the head of internal
audit, assuming the function is not outsourced, should have a
level of seniority equivalent to that of a member of the senior
management team or an executive director on the board.
If the external auditors are satisfied as to
the level and range of skills of the internal audit team; the
adequacy of the resources available to them and the independence
of the internal audit function they should be able to place reliance
on its work and take this into account in determining the amount
and nature of external audit work to be undertaken.
13. Should the role of audit committees be
We consider the UK Code on Corporate Governance
and the supplementary guidance for audit committees contains significant
guidance on the role of audit committees and on key issues impacting
on their effectiveness.
Whilst the guidance available is generally adequate,
we would encourage audit committees to review how it is implemented
in their company and to give particular attention to behavioural
and cultural issues in order to ensure the committee is achieving
its full potential.
14. Is the auditing profession well placed
to promote improvement in corporate governance?
We believe the auditing profession is one of
the players with an important role in promoting improvements in
corporate governance. As a firm we seek to do this through the
provision of assurance services and those on board and audit committee
effectiveness, risk management and internal audit and through
the development of publications and organising of events to disseminate