Audit reform ‘likely to fail’ per former FRC head – How can Big Four disruption go ahead?

Today, ex-FRC head, Paul Boyle has predicted that the UK’s planned audit and market shake-up is likely to fail. Following industry lobbying deflecting attention from the dominance of the Big Four accounting firms, to general standard improvement of corporate reporting and governance, it seems the monopoly of the Big Four is failing to be accounted for.

A shake-up is long overdue following scandals surrounding Pâtisserie Valerie, Thomas Cook, and Carillion due to conflicting interests arising from current Big Four dominance in the sector. While the focus may have been shifted, Boyle’s announcement will hopefully result in a renewed attention being placed on this monopoly. With the current structure of the sector leaving it vulnerable should one of the Big Four fail, diversity is essential and can be achieved through a liberalisation of ownership rules, allowing mid-tier firms the opportunity to grow and gain experience with FTSE250 companies.

Supportive structures for smaller and mid-size firms can still allow for a seamless disruption of the sector, improving standards in the process. A lack of auditor-independent advisors now may leave far too few options when businesses may need new audit firms.

Chris Biggs, partner at Theta Global Advisors has been leading by example at his firm. Theta provide accounting and consultancy services and deliberately do not audit companies to avoid any conflicts of interest, an approach Chris is keen to see applied across the professional services industry to maintain higher standards in a rapidly changing sector.

​Chris comments on the disruption of the Big Four’s monopoly and how auditor-independent advisors such as Theta are critical to ensure the independence of auditors:

“The potential issues around this shake up have been made clear but that is no reason to shy away from much needed reform. Possible quality risks, skills shortages, and resource shortages for firms outside of the Big Four performing particularly complex and demanding audits are in some ways to be expected. However, these risks can be managed and mitigated with appropriate structures to facilitate a growth period as these smaller firms gain more experience and resource when working on such projects.

“There have been three independent reviews so far and major failings are still happening with the Big Four’s current monopoly, now no one wants to be on watch when the next failing almost inevitably happens. The new minister coming in has certainly re-energised the push and it seems we are now more likely to see action.

“We have seen a shift of focus onto corporate governance standards and burden of proof being placed on companies and directors. However, disrupting the Big Four’s dominance must remain a priority for an effective shake up of the industry. Companies such as us at Theta working on a basis that is entirely auditor-independent are essential in ensuring current and future pools of auditors remain independent. If not, come time for companies to select a new audit firm, be it Big Four, or a mid-tier firm, there may not be many options left.

“Independence of the Big Four’s audit and consultancy services is crucial. We cannot risk jeopardising the independence of the audit because of lucrative consultancy services provided to the same client. Almost as important as this is the issue of ‘perception’, thepublic must have the perception that the audit role if fully independent and impartial at all times, otherwise they will lose confidence in the market.

“While this is a positive move there are issues that will still remain, such as what this reform of the big firms will mean for the mid-tier firms. Surely the push to open the audit market to the mid-tier firms will mean that they also need to be challenged with the same drive to reform. On top of reform, penalties for businesses and those who commit frauds or false accounting needs to be further strengthened to act as a real deterrent – addressing the auditor failings is only part of the issue.

“At Theta Global Advisors, we do not audit and hence, we are one of the few truly independent accounting advisory firms for non-audit services. Clients will avoid auditor independence issues if they engage firms such as ours and they could use other Big Fourand mid-tier firms who are not their current auditors, however, there are some issues there. By using such other firms who are also auditors, then if the clients want to change auditors in the future, they will have limited the ‘pool’ of possible auditors who are totally independent to engage i.e, firms who have not recently provided non-audit services. This could become problematic and continue to raise independence issues in the future.”