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U.K. audit sector faces new reforms in face of difficult 2018

The CMA is proposing legislation to separate audit from consulting services. And an independent review is recommending a new authority replace the accountancy regulator.

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Conservative MP, Andrew Tyrie, Chair of Parliamentary Commission on Banking Standards  and Chair of the Treasury Select Committee, now Chair of CMARight Hon. Andrew Tyrie, CMA chairman, said addressing the deep-seated problems in the audit market is now long overdue (Alamy/Troika)

A December report from the United Kingdom’s Competition and Markets Authority (CMA) is proposing new reforms to improve competition in the audit sector, which could mean a major overhaul for the Big Four accountancy firms in the U.K.

The CMA is proposing legislation to separate audit from consulting services; introduce measures to increase the accountability of those chairing audit committees in firms and impose a “joint audit” regime giving firms outside the Big Four—Deloitte, EY, KPMG and PwC—a role in auditing the U.K.’s biggest companies. It is now putting these proposals out for public consultation.

In October 2018, the CMA launched its investigation into whether the market is competitive and resilient enough to maintain quality standards. The review was ordered amid concerns about statutory audits, particularly following the collapse of several high-profile businesses, including the construction firm Carillion, and the criticism of those charged with reviewing the organization’s books.

Right Hon. Andrew Tyrie, CMA chairman, said addressing the deep-seated problems in the audit market is now long overdue. “Tens of millions of people depend on robust and high-quality audits,” he said. “If a company’s books aren’t properly examined, people’s jobs, pensions or savings can be at risk.”

NEW REGULATOR FOR ACCOUNTANCY SECTOR

Also in December 2018, the Independent Review of the Financial Reporting Council (FRC) published its report to the U.K. government, recommending the FRC “be replaced as soon as possible with a new independent regulator with clear statutory powers and objectives.” The new regulator would be called the Audit, Reporting and Governance Authority and would be accountable to Parliament.

The government ordered the review into the functioning of the accounting watchdog in June 2018 following a series of scandals, namely the collapse of Carillion. FRC CEO Stephen Haddrill announced in November 2018 he would step down in 2019.

The report comes just months after the FRC announced a new strategic program to ensure audit better serves the public interest, encompassing work on auditor independence, audit quality, the future needs of investors and corporate viability.

STAY UP-TO-DATE ON AUDIT NEWS

Refer to CPA Canada’s Auditor reporting guide: Reporting implications of Canadian Auditing Standards (CAS) for commonly occurring reporting circumstances. Download the report, Audit & Assurance in the Future, to gain deeper insight into technology’s impact on auditing and the skillsets auditors will need going forward.

Read what Michael Izza, the chief executive of the Institute of Chartered Accountants in England and Wales, shared with Pivot magazine about auditing and the Carillion fallout. Learn where closing the expectation gap stands with input from a panel of audit experts. And in midst of a major revolution, take a look at what the future of audit is looking like.