House of Commons Library

Company audits: problems and solutions

Published Thursday, January 10, 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, pensioners, 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, power and independence.
  • Lack of prudence in the accounts: accounting standards have evolved in a direction that permits or encourages less prudent accounting.

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

Momentum for reform has gathered pace. The following strands of work are discussed in this briefing:

  • Measures by the Competition and Markets Authority (CMA) to increase competition and focus competition on quality rather than price.
  • The creation of an independent statutory regulator, accountable to Parliament, with a new mandate, new clarity of mission, new leadership and new powers (Kingman Review).
  • Strengthening the UK’s framework in relation to capital protection and dividend payments (government consultation).
  • An independent review of the purpose and future of audit (Brydon Review).

Commons Briefing papers CBP-8385

Author: Federico Mor

Topics: Companies, Competition, Regulation

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