Peter Parry and Cliff Weight have written a joint response on behalf of the UK Shareholders’ Association (UKSA) and the UK Individual Shareholders’ Society (ShareSoc). This has been submitted to the CMA. We made these key points:
There are a few important and overarching issues which we believe need to be stated:
- Limitations of the CMA’s remit; the CMA was tasked with looking at the audit market and, in particular, considering ways of addressing deficiencies in current levels of market competition. The CMA has done this and has done it well. However, there is a risk in all this of losing sight of the main reason why audit has come under fire. The key requirement is for better standards of audit following the recent disasters of Carillion, Conviviality, Patisserie Valerie and others. A more competitive audit market should certainly over the long term help to ensure better audit quality. Whilst it is unsatisfactory that 97% of the FTSE 100 market is concentrated in the hands of the Big Four, some of the proposed mechanisms for achieving more competition, such as joint audits, pose potential threats to ensuring a high quality, coherent and seamless audit that provides investors with the assurance they want and need. In short, they may help to achieve more competition between audit providers but, in doing so, potentially jeopardise the main objective of achieving better audit quality, at least in the short term.
- Auditor appointment – an alternative approach to market management; the suggestion made by Sir John Kingman that auditors should be appointed by a third party (probably the new regulator) we believe is a much better way forward. It avoids the potential complexities of trying to reshape the market using joint audits with the risks and uncertainties that this could involve. It has the potential to put a team of experts in charge of audit tendering and audit appointment for FTSE 350 companies as well as creating appropriate mechanisms for audit market management. It also avoids the waste of getting every FTSE 350 company to run its own tendering process (every ten years without the benefits of learning that go with a more regulated specialist team) yet with all the potential conflicts of interest that are inherent in the current system. Clearly, it would be inappropriate for the regulator to perform this function working in isolation. It will need to work closely with, say, a stakeholder panel or steering group consisting of representatives from shareholder groups, FTSE 350 companies and, possibly, other groups. Shareholders would still have an ultimate right of veto over the appointment of a specific auditor.
The objections to Sir John Kingman’s proposal, primarily by the Investment Association (IA) and its members, we believe are entirely without merit or justification. Shareholders have not played any meaningful role in the appointment of auditors for at least the last fifty years. The notion that shareholders currently appoint the auditor is a sham, as the vote on the reappointment of the auditors at the AGM is invariably a formality and a foregone conclusion.
- A mechanism for holding auditors to account; there is a real need for auditors and audit committees to be held to account by shareholders. At present there is no effective mechanism for ensuring that this can happen. We believe that the AGM should be in two parts:
- Part 1: the normal business of the meeting, as at present
- Part 2: a meeting between shareholders on the one hand and the auditors and members of the audit committee on the other.
The detail of how this would work is discussed in our response to Question 1.
- The Big Four audit firms are effectively owned by the consultancy businesses. Some 75% of their income is from consultancy and we do not know what percentage of their profits, but we suspect it is more than 75%. Inevitably the power in the Big Four firms will therefore lie with the consultancy partners. Cultural norms tend to be driven by the consultancy business. This has not turned out to be good for the world of audit. It is a strong argument for the separation of audit and consultancy into separate firms.
We have responded to the specific questions raised in the consultation in our response.
The consultation document is available here.