PQ magazine May 2019
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Patisserie Valerie: would internal audit have saved the high street chain? More on page 26
TIME TO SPLIT AUDIT FROM CONSULTANCY This time it’s for real, this time there appears to be sustained If an audit political pressure to change cannot spot a the UK audit profession £90m fraud in a forever. £110m-a-year cake In fact, the time may even have shop, you have to come to split the ‘Big 4’ audit ask questions function from consultancy services altogether, says the Business, about what use it is Energy and Industrial Strategy at all (BEIS) Select Committee. – Rachel Reeves It’s ‘Future of Audit’ report endorses the Competiton and Markets Authority’s proposed operational split between audit and non-audit, but argues that going further with a complete structural break-up is the only way to tackle conflicts of interest and provide the professional scepticism needed to deliver high-quality audits. Chair of the BEIS committee Rachel Reeves MP stressed: “If an audit cannot spot a £90m fraud in a £110m-athe Big 4 firms, who prefer to talk about an year cake shop, you have to ask questions about ‘expectation gap’, and who feel people are what use it is at all.” expecting too much of audit. Reeves said: “We She felt in many ways audit is a 19th century found not an expectation gap, but serious product trying to adjust to a 21st century global delivery gaps!” She pointed out that even the economy. “So, it’s perhaps not surprising that Financial Reporting Council says some 27% of the nature and quality of audit is not what we audits are below standard. What other industry, want or what we need today,” she explained. she asked, would survive with this level of Reeves took a swipe at senior management in quality? A school would have been put in special
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measures straight away and a supermarket would see customers flocking somewhere else. The report said that the Big 4 accounted for 97% of the FTSE 350 audits and 99% of the FTSE 100 audits in 2016-17. To improve resilience and choice, MPs are recommending 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. Audit rotation also needs to move to seven-year non-renewable terms, with a cooling off period of three years in which non-audit services cannot be offered to a former audit client. There is a worry that the Big 4 firms are consistently underbidding for audit work. Reeves said across the Big 4 some 37% of audits end up costing significantly more than originally budgeted. In 73% of these cases a higher fee for audit was negotiated. “No wonder it is very difficult for challenger firms to compete on price with the Big 4,” she said. Reeves feels that the Big 4 are both cross-subsidising audit and under-pricing in their tender bids. “This is anti-competitive and it must stop,” she said. Continued on page 8