Mazars finds public support for joint audits
The series of widely publicised corporate collapses – in particular those of Carillion and Thomas Cook – has increased the public’s lack of trust in audit, according to top 10 firm Mazars
Research the firm commissioned from independent pollsters Survation found that fewer than one in five (17%) now trusts the UK audit system, while nearly two thirds (62%) said they did not believe that audit provided objective and accurate assessments of a company’s financial situation.
The survey also found widespread support for radical audit reform, in particular for mandatory joint auditing which 72% felt would provide a solution to the series of accounting scandals and corporate failures.
This result will have come as welcome news to Mazars which, over the years, has called for the introduction of mandatory joint audits against sometimes vociferous opposition from large sections of the audit profession. Its campaign was given a boost in April this year when the Competition and Markets Authority (CMA) gave its backing to mandatory joint audits as a key element of its proposals to reform the audit market.
Commenting on the findings, Mazars global head of audit David Herbinet said the research confirmed the firm’s long-held belief that the public had a real interest in an audit system that made the UK’s economy stronger through improved transparency and accountability.
“High profile company collapses are becoming all too common, and impact hard-working people who understandably have grave concerns and are now demanding action,” he said.
Herbinet pointed to the research which had also questioned people about their attitude to Carillion. Around 69% knew of the construction company’s collapse and of those, 81% were concerned about the impact on 30,000 suppliers, many of them small businesses, which were left out of pocket by some £1bn. A similar number were worried about fall-out for the 3,000 employees and apprentices who lost their jobs.
When asked to sum up their view about the collapse, the top three words they used were “disgust”, “anger” and “greed”.
“There is insufficient choice and resilience in the audit market,” he said. “Substantial reform is now critical to the sustainable success of our largest companies and the wider economy.
“Nearly three out of every four members of the public (72%) support the introduction of mandatory joint audit as a remedy, and we see this particular reform as a major opportunity to create an even playing field for challenger firms to compete more fairly in the large corporate market, in which 99% of the audit fees of FTSE 350 companies are currently paid to just four firms.
“A diverse market is vital for audit quality and for the overall functioning of the economy,” he added.
The CMA’s backing for mandatory joint audit does not seem to have improved support much beyond Mazars and the Business, Energy and Industrial Strategy (BEIS) Committee, however. Respondents to the Department for BEIS consultation on the CMA proposals appeared to be less than happy with the idea.
The Chartered Governance Institute, for example, stated categorically, “We do not support mandatory joint audits. We note the changes to the proposed design of the remedy and, while the limited exemptions are welcome, the changes do not address our original concerns. Mandatory joint audits would increase the cost of the statutory audit considerably, yet there is no evidence that the quality of the audit will be improved.”
The Investment Association agreed, stressing the lack of evidence that joint audits increase audit quality, independence and choice. It said that if the proposal was taken further, investors would need to be persuaded they would work in practice.
“There would be practical issues with two audit firms signing off the accounts, including lack of consistency in approach and increased costs; and lines of accountability are not necessarily clear in that liability is jointly held even if a particular party performed a weak audit which may affect incentives to carry out quality work,” it said.
The UK Shareholders’ Association told BEIS that it had started off being favour of the concept but, on further consideration, had become “more doubtful about the merits of joint audits for most FTSE 350 firms".
“Joint audits may well be a way of allowing challenger firms greater access to a market currently dominated by the Big Four and may help to promote greater competition in future,” it explained. “However, in terms of achieving the ultimate aim of better audit quality, it is a clumsy solution to the problem in that: it could actually compromise audit quality by creating unhelpful and contentious divisions between who does what in performing the audit; it could result in duplication of work; it could result in unintentional gaps in audit work; it could increase audit costs with little demonstrable benefit in terms of better audit quality.”
ICAEW thought that joint audits would not provide a quick fix for the problems of the audit market. Furthermore, they would prove costly for both auditor and auditee and might not end up improving audit quality.
Originally, it had given its support to a market cap for the Big Four firms but in its response to BEIS it said that if the choice came down to joint or shared audit, it would prefer shared audit.
Herbinet is unbowed. The CMA, he said, had come up with “a very effective range of measures to create a genuinely competitive audit market that addresses the needs of society”.
“This represents the clearest opportunity in decades for real change,” he added. “It’s now time to maintain momentum and pursue brave solutions.”
Originally published in Economia on 22 October 2019.