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 An annual audit is a statutory requirement for all listed and large companies. The purpose of the audit is to provide assurance to shareholders that the financial statements give a true and fair view of the company. Good audit, though, doesn’t just protect shareholders, but also employees, pension holders, suppliers, customers and the wider community. At the broadest level, it serves the public interest by underpinning transparency and integrity in business.

Accounting and audit failures periodically turn the spotlight on a range of problems with the industry, and the audit of large companies in particular. Key problems include:

  • Lack of competition: the ‘Big Four’ accountancy firms dominate the market and they are arguably ‘too few to fail’.
  • Conflicts of interest: auditors can be caught between the interests of the company’s management, their own interest, that of their firm and their duties as auditors.
  • Poor quality and inadequate purpose: too many audits are found to be wanting by the regulator, and fail to meet wider expectations.
  • Weak regulation and supervision: the regulator lacks resources, powers and independence.
  • Lack of prudence in the accounts: accounting standards have evolved in a direction that permits or encourages less prudent accounting. At the same time, compliance with the laws that demand prudence in the payment of dividends and protect the company’s capital is patchy.

There were several major reviews of how the audit industry works – and how it might be improved – in 2018 and 2019, each recommending significant reform. After considering these, in March 2021 the Department for Business, Energy and Industrial Strategy published a White Paper setting out proposals to make wide-reaching changes to the roles and responsibilities of directors, shareholders, auditors and the audit regulator, in an attempt to drive up standards.

The reforms include increased accountability for directors, a new audit regulator, requiring a clearer operational separation of the audit and non-audit activities of firms, and mandatory shared audits for FTSE 350 companies between the Big Four and smaller competitors. A consultation on these proposals closed in July 2021.

The Financial Times has stated that the proposals have been “broadly welcomed by audit executives and business groups”, though concerns have been raised by some industry participants, politicians and academics over the costs of the reforms on businesses, on whether they are likely to successfully deal with the problems in the audit industry, and on whether increased accountability for directors might hamper attempts to boost diversity in boardrooms.

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