CMA Report on UK Audit Released

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In its April final report on the “statutory audit services market,” the United Kingdom’s Competition & Markets Authority (CMA) offers four main recommendations, plus a few others for the new regulator to consider. These come a month after UK Business Secretary Greg Clark announced the Financial Reporting Council (FRC), which oversees the accounting profession, is being replaced with a new regulator called the Audit, Reporting and Governance Authority (ARGA). The CMA’s core recommendations to the ARGA and the UK government include: 1- Audit committee scrutiny. 2- Mandatory joint audit, including at least one non-Big Four firm, for most large companies; peer reviews for the largest; and measures to mitigate the effects of a Big Four failure. 3- An operational split between the audit and non-audit practices of the biggest firms. 4- A five-year review of progress by the new regulator. The report also mentions as meriting “careful consideration” technology licensing and a change in firm ownership.

As another possible measure, the CMA suggests: “Keeping under review the possibility of cross-industry technology licensing, potentially facilitated by the regulator and/or the professional bodies. Access to technology has not been cited as a major barrier, at least by the bigger challenger firms, but technology changes are likely to play a potentially significant role in the way the sector develops in coming years.”

The CMA also believes firm ownership rules should be reviewed: “Re-considering the necessity of the audit firm ownership requirements, which currently require that audit firms are majority owned by qualified auditors. Although the existence of potential entrants following a different business model is highly uncertain, such businesses may never even be contemplated if their route to launch is blocked by regulation.”