Homepage
New report by French regulator confirms CMA recommendations on Joint Audit

New report by French regulator confirms CMA recommendations on Joint Audit

In April, following a series of corporate failures without any warning from the auditors, the Competition and Markets Authority (CMA) published a report recommending mandatory joint audit as a cornerstone of audit reform in the UK. The CMA sees joint audit as the only proven measure against a lack of competition in the audit market for large companies. This caused a global debate on the merits of joint audit. The discussion about how to implement the reform in the UK is still ongoing. A new report by the French regulator H3C now clearly confirms the link between joint audit and market diversity: essential reading for policy makers in Europe and beyond.

As the consultation by the UK government on the CMA’s recommendations for reform of the UK audit market has now closed, views are still split on whether the competition authority’s strong recommendations will have the desired effect. A series of high-profile company failures have cast the spotlight on the audit sector, and all market participants agree that something needs to change. The CMA identified that current market concentration, whereby 100% of the FTSE100 and 97% of the FTSE 350 are audited by just four firms, is unsustainable. To strengthen competition and build a healthier audit market, the CMA recommended a comprehensive reform package including making joint audit, in which two firms audit a given entity, mandatory for FTSE 350 companies. Within these joint audits, at least one of the auditors must be a company outside the “Big Four” auditing firms that currently dominate the market. The CMA believes that joint audits are an indispensable measure for increasing diversity in the UK audit market, creating sustainable competition and resilience.

The introduction of joint audits in the UK would have a transformative effect on the UK market: a compelling fact for many and an unwelcome one for others. In the midst of a debate around the practicability and effectiveness of this joint system, we have only to look across the English Channel for a window onto our potential future. France, a fellow G7 economy with a major listed market, has operated mandatory joint audits for over 50 years. Now, a new report by H3C [1], the independent regulatory authority responsible for overseeing the activity of statutory auditors in France, provides greater detail on the system and the reasons why it works in France.

The report, published every three years, assesses levels of market concentration; overall audit quality; risk factors, and the work of audit committees. This iteration of the report delivers clear conclusions about the impact of a joint audit system in France and speaks directly to the current challenges faced in the UK market. While Joint Audit in France does not require to appoint a non-Big 4 firm, still the number of market participants which audit Public Interest Entities (PIEs) is vastly greater in France: Three companies in the CAC40 and 19 companies in the SBF120 have an auditor other than one of the big5 [2]. Beyond the simple fact of a more diverse and resilient market, the report also draws on decades of experience to highlight positive impacts on quality. H3C emphasises the value of a ‘second pair of eyes’ as well as the benefit of continuity when one auditor rotates off, leaving the remaining joint auditor in place, with existing knowledge of the client.

With the UK making meaningful steps to audit market reform and expected future revisions to the EU audit regulatory regime, the world is watching. The H3C report provides important insights for the debate both in the UK and at EU level: It evidences very clearly that mandatory joint audit builds diversity and resilience in an audit market, directly addressing the most acute risks highlighted by the CMA and others: instructive reading for policymakers both in the UK and abroad.

 

[1] Source: H3C report, 17 June 2019, http://www.h3c.org/fiches/Rapport-Suivi-du-marche-H3C-17juin2019.pdf

[2] Source: H3C Report, 17 June 2019; Another analysis produced in La Profession Comptable, June 2019, confirms that 13 auditors other than the big4 have at least one mandate in the SBF120

Close
Reset