Perspectives on audit reform

December 2018

Recent accounting controversies in the United Kingdom (UK) have brought the audit profession into the limelight, prompting calls for greater scrutiny and actions that could change the way the profession works. If past debates on audit and financial reporting in the UK are any indicator, this effort could inspire the European Union (EU) to consider further measures in these areas. What kind of changes are being debated in the UK, and how realistic would it be to adopt them?

With the broader significance of the UK debate in mind, members of the European Audit Committee Leadership Network (EACLN) explored elements of this debate at their meeting in Brussels on November 16, 2018. Using some of the ideas that are emerging in the UK debate as a springboard, members discussed the advantages and disadvantages of these concepts for improving audit quality.

  • Background on the UK debate
    Recent accounting-related controversies in the UK have raised questions about oversight of the audit industry. Investigations are examining both the industry and its regulator, the Financial Reporting Council (FRC), while a broader debate has generated varied proposals for reform. EACLN members see a clear possibility that the ultimate outcome in the UK could influence evolving practices in the EU.

  • Promoting competition
    EACLN members discussed several ideas aimed at increasing competition in the audit market and raised concerns about whether the reforms were capable of achieving their intended effect. They said that breaking up the Big Four accounting firms is impractical because of the size and resources required to audit a large, global company, and they feared that market share caps would limit access to the best auditors. Entry by a technology company, on its own or in partnership with a smaller audit firm, is unlikely, members suggested, as is the merger of two smaller firms.

  • Promoting independence
    EACLN members also raised questions about the viability of any proposal to prevent audit firms from also having consulting businesses. Members noted that audit and nonaudit services complement each other, and the latter helps firms attract talent. However, some members generally supported a ban on nonaudit services to audit clients, so long as the scope of the audit is broadened to include more activities that enhance an auditor’s understanding of its client’s business.

  • Other ways of improving audit quality
    Members also contemplated other ways in which regulators could enhance audit quality, including ramped up enforcement of current regulations. A few saw potential benefits in regulations along the lines of the US Sarbanes-Oxley Act (SOX), though others were skeptical about the ability of regulators to intervene effectively. Several members mentioned an enhanced role for the audit committee, noting that requirements in the EU’s Audit Regulation and Directive (ARD) of 2014 are already nudging audit committees in that direction.