The UK Parliament´s Business, Energy and Industry Strategy Committee says that it favours model that the Big Four companies should aim for the full structural break-up into audit and non-audit businesses.
The Parliament Committee has taken more target-oriented view than other reports, which have suggested that operational spilt would be enough. According to the Committee summary this way the break-up would be more effective in tackling conflicts of interest and providing proffessional argument needed to deliver high-quality audits.
According to the Committee recommendations:
- consider extending the scope of audit to cover the entire annual report, albeit with different levels of assurance and reporting. Critical areas such as corporate governance and payment practices ought to be subject to a robust assurance process and meaningful reporting by the auditor.
- Auditors should be encouraged and empowered by the new regulator to speak their mind openly and clearly in audit reports, without fear or favour.
- They should call out poor management when they see it. If there are barriers to auditors taking on more responsibilities and reporting on them candidly (such as unlimited liability and skills issues), the Brydon Review should include proposals for removing these barriers
- We believe that requiring auditors to present at the AGM (annual general meeting) is a good way to generate engagement. This direct dialogue with shareholders would also remind auditors who they are accountable to. It would require them to demonstrate their independence and evidence their willingness to challenge management to a wider audience than the Audit Committee
There should be a requirement in the new Stewardship Code for investors and asset owners to consider audit matters.
Auditors should make a presentation at the AGM to show how they have challenged management and exercised professional scepticism to underpin their audit opinion, and to raise any major issues
- in order to be useful, information must be timely. The FRC and its successor should consider requiring companies to publish the audit report at the same time as results are announced (instead of waiting for the full annual report to be published, which often happens a month later, even though the audit report is ready and signed off before results are announced)
- An economic separation of audit and non-audit is highly desirable. We recommend that the CMA (The Competition and Markets Authority) at the very least implements the proposed operational split to achieve the separation of economic interests.
- We encourage the CMA to aim for full legal separation of audit and non-audit services. The CMA should look to the long term, and not let one-off, short-term implementation costs weigh too much in its calculations. If the operational split is chosen instead, the CMA and ARGA should conduct a review of the arrangements after three years to determine whether the split has ended cross-subsidies and improved culture, independence and transparency. If not, we recommend that the CMA then move to implement a full structural break-up of the Big Four intoaudit and non-audit businesses in the UK.
- We recommend that because of their strategic importance the Government should examine the auditing of banks to explore whether additional safeguards are required in this sector
The Committee also reminds that the Big Four companies (EY, PwC, KPMG and Deloitte) accounted for 97 per cent of FTSE 350 audits and 99 per cent of FTSE 100 audits in the years 2016-2017.
– To improve resilience and choice, the report recommends a segmented market cap and the use of joint audits, on a pilot basis, for the most complex audits to enable the challenger firms to step up, the report higlights.
The report also recommends increasing the frequency of audit rotations to seven-year non-renewable terms and (should the CMA go ahead with an operational split) a cooling off period of three years, in which non-audit services cannot be offered to a former audit client.
– Change is needed to deliver for investors, workers and the public. The Big Four may not like it, they may seek to undermine the case for reform, but vested interests should not be allowed to get in the way of positive change. We must not wait for the next corporate collapse. Government and regulators need to get on and legislate to deliver these reforms and ensure that audits deliver what businesses, investors, pension-holders and the public expect, says Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy Committee.
The report also see the UK version of Sarbenes-Oxley as a possible outcome in the future.
– The report welcomes the Government’s commitment to consider and consult on the possible introduction of a strengthened framework around internal controls on a similar basis to Sarbanes-Oxley. The report suggests that if adapted to the UK regulatory system, a UK equivalent could make a significant contribution to improving the reliability of financial reporting, the report says.
The Business, Energy and Industrial Strategy Committee is appointed by the House of Commons to examine the administration, expenditure and policy of the Department for Business, Energy and Industrial Strategy (BEIS).