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Company audits: problems and solutions

Published Wednesday, November 21, 2018

This briefing explains how audit works, the problems the industry faces and possible solutions.

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

To increase competition in the audit market for listed companies, some options open to policymakers are:

  • Encourage and facilitate the entry of smaller players;
  • Break up the “Big Four” into eight accountancy firms;
  • Split up the “Big Four” to create four audit-only firms.

To reduce conflicts of interest, policymakers can:

  • Ban audit firms from providing non-audit services to their clients;
  • Change the process for the appointment of auditors, aiming to reduce the influence of company executives.

To raise the quality of audit, policymakers should focus on improving regulations and the supervision of auditors.

Finally, if the end goal is to make accounts more prudent and companies more resilient, reforms to accounting standards have a key role to play.

Momentum for reform has gathered pace. Several strands of work are discussed in this briefing.

Commons Briefing papers CBP-8385

Author: Federico Mor

Topics: Companies, Competition, Regulation

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