A once in a generation opportunity for audit transformation

“We now have a once in a generation opportunity to transform audit and renew the broader corporate governance system in order to strengthen resilience within our leading companies and on our capital markets. We must seize it. The UK’s post-pandemic recovery, and the ability for our companies to flourish on the global stage, hinge on the effectiveness with which we support UK businesses in the face of a likely recession. We welcome the Government setting out alternative options in certain areas. Promoting the right balance between entrepreneurship and accountability, which is the essence of good governance, should be the Government’s primary focus as it determines the way ahead. 

“There will be discussion and debate about the implementation of its recommendations, but we must commend BEIS on coordinating the findings of three broad-ranging and complex inquiries and outlining a productive way forward. We must all now focus upon establishing clarity on timings and the process of implementation to move forward at pace and seize this generational opportunity”.

Mazars is wholly committed to the making the requisite investment to participate in a reformed market, as well as working with peers, regulators and broader stakeholders to achieve meaningful and long-lasting reform in a number of key areas, including:

The Big 4 and challenger firms working together on FTSE350 audits 

The CMA’s thorough and independent inquiry found that a lack of competition and resilience is undermining the viability of the audit market. It recommended the introduction of Joint Audit to rectify these issues. Managed shared audit, as proposed in today’s White Paper, is a weaker measure. However- if implemented robustly – it could be an important first step towards longer-lasting reform. Above all, challenger firms should audit meaningful subsidiaries with an international scope, and targets need to be set and monitored for the share of the audit market to be held by challenger firms to enable a healthier market to emerge. This should be at least 20% of total audit fees in the FTSE350 after 5 years of reform.

There remains an acute need to increase the number of firms with audit appointments in the FTSE350, and especially at the top end of the FTSE100. In the current market were one of the existing dominant firms to leave it would seriously destabilise capital markets and companies could be left without an auditor. This must be addressed without further delay.  

Renewing the scope of audit and improving audit regulation

The scope of audit also needs to be extended to meet the changing needs of stakeholders and wider society in particular to ensure high quality reporting on sustainability and viability and to strengthen auditors’ role in fraud detection.

We also need to strengthen audit regulation and this extends beyond increasing the regulator’s ability to levy fines. It is also about how audit reviews are carried out and reported on. We must make sure auditing remains attractive to the most able young accountants and to experienced auditors.    

Support for a proportionate strengthening ofreporting on controls  

We strongly support boards paying more attention to controls over information provided in the annual report to ensure it is reliable. However, proportionality is key. We must not implement a system which deters talented directors from taking board roles, and we should not attempt to simply transpose a system like Sarbanes-Oxley from the US which is neither appropriate nor required. The UK Corporate Governance Code is well respected: rather than starting afresh, we lean towards strengthening the existing wording in it. 

Focusing on prevention and improvement rather than penalties

The regulator should harness opportunities to help companies improve and prevent problems arising, rather than primarily focusing on investigating failures. It must have a proactive approach to addressing issues when identified, including on competition issues, whilst at the same time avoiding over-interventionist regulation. This would have the dual benefit of improving standards and eliminating a dynamic which currently discourages new entrants to the market.

A measured approach to extending the scope of PIEs to large private companies 

The Kingman Review called for an investigation into whether the definition of Public Interest Entities (PIEs) should be extended to large private companies, and there seems an enthusiasm to do this. Care needs to be taken to ensure it is proportionate and that the significant regulatory costs imposed on companies and audit firms as a result of the former being classified as PIEs are justified. Careful consideration should be given to which private companies are added to the list of PIEs and the additional requirements that should apply to them as it is clear being a PIE will bring significant additional costs. 

For press enquiries, please contact Josh Voulters, Head of Communications, on Joshua.voulters@mazars.co.uk or 07939 024 640