The FT has noted this morning that the Competition and Markets Authority, which is conducting a review into the failings of the audit sector has reservations about its task, saying::
The CMA has already indicated it has reservations about a forced break-up of auditors, which would involve either dividing the Big Four into eight smaller firms that carry out consulting and auditing, or forcing the firms and their smaller rivals to form “audit only” groups that have no ties to their consulting arms.
They add:
The industry is opposed to both options.
Which is no great surprise. Thankfully the FT notes there are alternative voices:
However, a group of academics and audit experts – which include Atul Shah, professor of accounting at the University of Suffolk, and Richard Murphy, a chartered accountant and tax campaigner – urged the CMA to consider creating audit-only firms to “reduce the opportunity for . . . conflicts of interest”.
It also recommended that the Big Four should then split their remaining audit-only practices to create eight smaller firms solely focused on auditing. This would address concerns over the continued dominance of the Big Four.
In its submission to the CMA, the group said: “We believe that the culture and ethics of auditing have failed miserably at too high a cost to society. In particular, we suggest that the [Big Four] have failed to make integrity, sincerity and transparency central to their culture, despite being given [an] effective monopoly to audit large corporations.
“These firms have become entirely profit-oriented commercial entities, helping clients to secure public contracts and assets whilst avoiding taxes on an industrial scale. In the process, they have also produced a generation or more of professional accountants who have gone on to run big corporations with this culture and values, so spreading the virus.”
We have no choice but try to influence outcomes. It is the way change happens.
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I wholeheartedly support this move – given the evidence – how could it not be considered?
Good luck.
Chinese walls spring to mind and gaming. Is there any evidence of collusion between auditors and short selling firms?
External audit does not make any profit. The other lines of service in the big 4 will be delighted to carve it off as their profit per partner will go up.
There is no reason why it need not make profit
Change the market and it will – the price will simply go up as the cross-subsidy goes
That’s a simple fact
Companies have to buy an audit
it is a seller’s market
It is wrong to think that auditing doesn’t make a profit, of course it does. Just look at the earnings of the big firms’ partners. I chaired an audit committee for 5 years and I can assure you that both firms we had as auditors during those years – a big 4 then mid-tier – made a decent profit.
About £700,000 on average a big four partner….
As a tax partner in a big 4 firm I can assure you our external audit practice contributes little to our profits. Many of us would rejoice at the departure of that part of our business. We could provide non-audit (eg tax) services at will to clients without regard to audit independence and audit conflicts
I agree the cost of audits will rise as a result of splitting the external audit teams off. There would be no subsidy from the rest of the firms activities.
In other words they are profitable
You just ignore the cross subsidy
That is not great indication of accounting sense or ability, if I might say so
I have just read that “In its submission [to the CMA], the Institute [of Chartered Accountants in England & Wales] said breaking up the Big Four would not be helpful. It explained this could result in large numbers of staff moving between the firms after break-up, and it would not be possible to prevent staff from moving, or restricting where they chose to work in a free labour market.”
Surely this is the whole point?
I may have to think hard about renewing my subscription.