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Key plank of audit reform plans faces axe under Tories | Business News

By November 25, 2019 No Comments
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A proposal to impose mandatory joint auditors on large listed companies is poised to be discarded by the Conservatives if they win the general election following a backlash from accountants and corporate Britain.

Daily Week News understands that officials at the Department for Business, Energy and Industrial Strategy (BEIS) have signalled during private discussions in recent weeks that a system of joint audits is unlikely to be introduced as part of a broader package of measures to overhaul the profession.

The mandatory joint audit proposal was made by the Competition and Markets Authority (CMA) in April.

Whereas joint audit would see a second firm – from outside the big four of Deloitte, EY, KPMG and PricewaterhouseCoopers – acquire collective responsibility for the oversight of large companies’ books, officials at BEIS have instead been floating the idea of shared audits, which would involve the smaller firm auditing only one division or subsidiary of a company.

“Joint audits are dead in the water as far as the UK is concerned,” one senior figure said.

BEIS has been consulting on the CMA’s proposals for several months.

Sources close to the process emphasised on Monday that decisions about the scope of audit market reform had yet to be finalised and that they would be a matter for the next government.

Labour’s manifesto includes far more stringent measures than even those recommended by the CMA, with the party insistent that it will break up the big four’s “cartel” by legally separating their audit and consulting arms, creating a new statutory body to oversee the auditing of financial institutions and ensuring that audits are subject to a public tender process.

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A Department for Business spokesperson said: “As part of our ongoing consultation on audit market reform, we are discussing a range of policies with the industry.

“It will be for ministers to determine the policy once a new government is formed.”

Accountants beyond the big four have largely criticised the CMA’s joint audit proposal, largely because of the financial liabilities to which such a framework could expose them in the event of enforcement and legal actions relating to audit failures.

Major companies are also vigorously opposed to joint audits amid concerns that they would further complicate an already-complex process without improving the quality of financial oversight.

Prominent corporate collapses in recent years, such as those at BHS, Carillion and Thomas Cook, have thrown an increasingly harsh spotlight on the audit profession and left the big four paying tens of millions of pounds collectively in fines.

The Tory manifesto included a vague reference to reforming the audit market, but said little about the content or timetable for implementing them.

Last month, Daily Week News revealed that the architect of moves to strengthen audit oversight had complained about the government’s failure to deliver legislation needed to beef up regulators’ powers.

Sir John Kingman, the former Treasury mandarin whose report last year paved the way for the abolition of the Financial Reporting Council (FRC), warned in a letter to MPs that ministers were in danger of letting the body “drift on, half-reformed and lacking the teeth that only legislation can give it”.

In recent months, the FRC’s leadership team has departed and been replaced by Simon Dingemans, the former GlaxoSmithKline finance chief, who has taken over as chairman; and Sir Jon Thompson, who joined as chief executive after the summer break.

Intensifying scrutiny of the audit sector has already prompted‎ Deloitte and KPMG to say that they will cease undertaking non-audit work for the FTSE-350 companies whose accounts they supervise.

As the auditor to Carillion, KPMG is facing scrutiny for its oversight of the construction giant, which went bust in January last year with debts of more than £5bn.

KPMG, whose chairman Bill Michael has described the sector as “an oligopoly”, earned roughly £1.5m annually as Carillion’s auditor, with significant sums earned in addition from non-audit work.

Sir Donald Brydon, a respected City figure, is overseeing a separate review examining the future of corporate auditing that is expected to report in the coming months.

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