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Shared audits: is a problem halved a problem solved?

21 February 2020: having a second party scrutinise the books of FTSE companies has overlapped in the trio of audit market reviews – but are joint or shared audits necessarily the silver bullet required to strengthen audit quality? Mark Taylor reports.

The UK’s largest companies could be required to undergo shared audits, according to recent media reports, as the government and regulators consider further remedies to improve trust, transparency and competition in the accounting sector.

However, industry experts remain sceptical that such a move would benefit audit quality or the companies concerned, given the complexity, cost and time-scale of making the necessary changes.

Current thinking runs along two lines: shared audits and joint audits.

Shared audits concern a single firm, usually one of the Big Four, holding responsibility and liability for the audit, while giving over a proportion of the work (30% minimum) to a smaller “challenger” audit firm.

Under a joint audit, two firms share the liability for the entire audit, but the same minimum threshold for the work carried out by the second auditor can apply.

Three separate investigations into the state of audit have been carried out in recent years, with the Competition and Markets Authority (CMA), Sir Donald Brydon and Sir John Kingman all conducting their own reviews.

The subject of having a second party scrutinise the books of FTSE companies has overlapped in the trio of reviews.

The CMA has come out in favour of joint audits. It believes this setup will create healthier competition by increasing the number of firms carrying out the examinations, and as a result strengthen the quality of audits overall.

Joint audits used to be a fairly standard procedure in the UK but have been phased out over time as the size of audit firms grew.

The pendulum has swung internationally too. In recent years, Denmark, South Africa and Canada reformed their accounting sectors to eliminate shared audits entirely, for reasons of cost and unbalanced workloads. In France, joint audits are mandated for larger listed companies, banks and political parties, but involvement of a challenger firm is not.

An independent review into the subject of splitting the work between two firms was carried out last year by Dr Javed Siddiqui, Senior Lecturer in Accounting at the University of Manchester. However, he found very little evidence that the process would result in improved audit quality. The report outlined that hiring two firms would also cost significantly more for the audited firm, with no guarantee of better results.

One of the main issues Siddiqui found concerned the ability of challenger firms to scale up to the requirements of complex audits of multinational companies. Significant investment would be necessary to perform such a body of additional audit work, and the challenger firms would also need the services of personnel who are skilled in tendering procedures.

“I'm sure regulators can find a way of operationalising joint audits in the UK, given that it already exists in France and few other countries,” he said. “However, although joint audits may allow more audit firms to access the large company audit markets, the impact of such audits on ensuring the quality of financial statement audit is not clear. And then, the Brydon report has challenged the sufficiency of financial statement audit by defining audit in a broader sense. We therefore probably need to rethink how joint audits would fit into this agenda.”

Last year, the ICAEW Audit and Assurance Faculty published its own research into the subject entitled 'Shared and joint audits: are two auditors better than one?’.

The researchers were also unconvinced of the arguments and echoed Siddiqui’s view that much more research is needed.

The ICAEW team said one of the main problems to overcome is the catch-22 situation whereby challenger firms are unable to demonstrate that they have the experience to bid for larger engagements without first having gained that experience.

Alongside the necessary legislative changes, the government and regulators would need to increase the guidance and support they currently give to challenger firms and listed companies, and establish a process to determine whether there was a positive effect on competition and choice, and on audit quality, over time.

“Shared audit, unlike joint audit, is covered by existing auditing standards, but would still not be a quick fix,” said Nigel Sleigh‑Johnson, ICAEW Director, Technical Strategy Accountability Group. “It would require over a number of years investment of regulatory time and effort and investment by challenger firms. If shared audits are newly mandated, everyone involved will need to take a long-term view of the not insignificant changes required.”