UK Statutory Audit - Kingman and CMA Reports issued

Dec 21, 2018

Following consultations earlier in 2018, this week has seen the publication of two very significant reports on the regulation and operation of the UK statutory audit market. Sir John Kingman issued the Independent Review of the Financial Reporting Council (‘Kingman Report on the FRC’) while the Competition and Markets Authority (‘CMA’) issued its update paper on the Statutory Audit Services Market Study (‘CMA update paper’). Institute Chief Executive Barry Dempsey comments on these developments.

CMA update paper

The original CMA invitation to comment (‘ITC’) in October 2018 contained a wide range of potential measures, aimed at increasing competition, enhancing incentives to better align audit services to shareholder interests, improving market choice and opportunities for switching auditors and bolstering the resilience of the UK audit market, particularly against the failure of one of the Big Four audit firms. 

Following the consultation, to which Chartered Accountants Ireland made a detailed submission (submission at this link), the CMA has developed a proposed package of remedies to address the key concerns in its study, including three core proposals:

  1. Regulatory scrutiny of auditor appointment and management, with a view to securing audit committees’ accountability and independence;
  2. Mandatory joint audit, with a view to breaking down barriers to non-Big 4 firms;
  3. An operational split between the audit and advisory businesses of audit firms, aiming to address identified conflicts between the provision of audit and non-audit services, while mitigating against some of the key negative consequences of alternatively introducing full ‘audit-only’ firms.

Other remedial measures discussed in the update paper include peer review prior to the accounts being signed off.  The above remedies are discussed in the update paper as preferred alternatives to other measures originally proposed in the ITC (e.g. an independent body to appoint auditors, market share caps and fully audit-only firms), though the update paper suggests that the CMA may take future steps in relation to these should sufficient progress not be made via the current proposed package of measures.  Potential measures in the original ITC not being pursued by the CMA include the break-up of the Big 4 firms and the creation of a national audit office (NAO) style auditor for private sector audits.

The CMA is now consulting on this proposed package of measures until 21 January 2019 with final recommendations expected by April 2019.  Chartered Accountants Ireland will again participate in this consultation.

Kingman report on the FRC

Following the Kingman Review’s call for evidence, to which Chartered accountants Ireland responded in detail in August 2018 (submission at this link), the Kingman report calls for the replacement of the FRC with a new independent regulator (suggested title: ‘Audit, Reporting and Governance Authority’) with clear statutory powers and objectives.  It recommends that the new regulator should be accountable to the UK parliament.  In total there are 83 different recommendations addressing the structure and purpose of the regulator, the effectiveness of its core functions, the role and powers of the regulator with respect to corporate failures, oversight and accountability, staffing and resources, and other matters.  Some key recommendations include:

  • The new regulator taking responsibility for the approval and registration of audit firms which audit UK PIEs from the Recognised Supervisory Bodies (including Chartered Accountants Ireland);
  • Enforcement action against accountants in relation to apparent wrongdoing in public interest entities should be undertaken on a statutory rather than voluntary basis, as is the current arrangement;
  • That the regulator has the powers to investigate the actions of all directors, not just those who are members of accountancy bodies;
  • The introduction of a duty of alert for auditors to report viability or other serious concerns to the regulator;
  • Giving the regulator powers to commission a ‘skilled person review’, paid for by the company, in relation to its strategic objective to “protect the interests of investors and the wider public”, and to publish such a report if it is judged to be in the public interest;
  • That the Department for Business, Energy and Industrial Strategy (‘BEIS’) give serious consideration to a strengthened framework around internal controls;
  • That staff, board or committee members are prohibited for the foreseeable future from working on any regulatory functions relating to a past employer;
  • Enhanced obligations with regard to the review of the audit market; and
  • That BEIS should put in place a statutory levy and the current voluntary funding approach should cease.

Next steps

As noted above, the CMA is further consulting on its proposed package of proposals. 

In addition, BEIS has announced an independent review, to be chaired by Donald Brydon, outgoing Chair of the London Stock Exchange Group, on the quality and effectiveness of the UK audit market.  BEIS has said that the Brydon review into UK auditing standards will build on the Kingman and CMA reports by considering “how far audit can and should evolve to meet the needs of investors and other stakeholders”. 

Chartered Accountants Ireland Chief Executive Barry Dempsey commented on these developments as follows:

“We at Chartered Accountants Ireland welcome the publication on Wednesday of both the CMA update paper on its UK statutory audit services market study and the Kingman report on the FRC.  There is widespread agreement that audit quality must be at the heart of any reforms in the sector and that steps be taken to restore public trust and confidence in the statutory audit function. 

We also welcome the announcement of the Brydon review into the scope and purpose of the audit, aimed primarily at substantively closing the gap to stakeholder expectations of the audit.  Whilst we, and indeed other stakeholders, may not agree with everything that is proposed, we fully recognise the importance of the on-going debate. The response to the recommendations contained in these reports and reviews will be pivotal to achieving these shared aims of high quality audit and high levels of public trust and confidence. 

Of course it is critical that any changes implemented in the UK can work in the global context of the auditing profession.  In our CMA response we highlighted the need for coordinated solutions to enhance corporate reporting and statutory audit globally. The proposed measures address complex issues and their design will be critical in terms of implementation and effectiveness.  

Chartered Accountants Ireland has submitted detailed responses to both the CMA and Kingman consultations and looks forward to engaging further on these matters as they develop”.