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Company audits: problems and solutions

Published Thursday, April 18, 2019

This briefing explains how audit works, the problems the industry faces and how it is being reformed.

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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 ‘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 are different solutions to these problems, but there is no silver bullet that can solve them all.

Momentum for change has gathered pace. Government, regulator, independent reviews and the Business Committee of the House of Commons have explored and recommended sweeping reforms in the second half of 2018 and 2019. Implementation is expected to follow quickly, with some early actions already taken. The following strands of work are discussed in this briefing:

  • The Department for Business, Energy and Industrial Strategy (BEIS), looking at tightening rules on the payment of dividends, and implementing recommendations from the other parties;
  • The Kingman Review, recommending the creation of an independent audit regulator, accountable to Parliament, with a new mandate and new powers;
  • The BEIS Select Committee, looking at audit in the round, including the role, culture and independence of auditors;
  • The Competition and Markets Authority, looking at the audit market to increase choice and resilience, and focus competition on quality rather than price;
  • The Brydon Review, looking at the purpose, scope, quality and effectiveness of the audit product.

Commons Briefing papers CBP-8385

Author: Federico Mor

Topics: Companies, Competition, Regulation

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