Managed shared audit “insufficient”, ICAEW argues

The Institute for Chartered Accountants in England and Wales (ICAEW) has warned that plans for managed shared audit could “adversely” impact quality and that an alternative model must be considered.

“A more open, competitive audit market is an important objective of the UK’s audit reform agenda,” says Katharine Bagshaw, auditing standards manager at the ICAEW.

“However, our discussions with stakeholders suggest that while managed shared audit could help to a limited extent, it would be insufficient on its own.”

The core of the government’s managed shared audit plan would require UK-registered FTSE 350 companies audited by a Big Four firm to hand a portion of the work to a ‘challenger’ firm.

In fact, little support has been expressed for managed shared audit among stakeholders, according to Bagshaw, noting that it will be “impractical, difficult to deliver, fail to make much of an impact for many years, and could impact audit quality adversely”.

However, a series of alternative systems for improving competition have been widely-touted, including a cap on the market share of the Big Four.

“A market share cap might be easier to deliver, less disruptive, and allow audit reform objectives to be achieved more quickly,” Bagshaw says.

She also suggested that a combination of managed shared audit and market share cap might be effective, despite it requiring “greater intervention, such as liability reform” from the government.

Financial Reporting Council (FRC) chief Jon Thompson, speaking at an ICAEW conference in October, confirmed that he has asked ministers for the authority to enforce such a cap.

He went on to question the likelihood of such a move being made, however.

Are challenger firms up to the task?

Despite calls for more higher-profile audits being handed to firms outside of the Big Four, a wave of sanctions against audit challenger firms call into question whether mid-sized firms can provide high-quality audits of large listed companies.

For instance, Grant Thornton, the UK’s sixth-largest accounting firm, has recently been fined £2.3m and £1.2m for misdemeanours surrounding its audits of Patisserie Valerie and Interserve respectively.

“We regret the quality of our work fell short of what was expected of us in this instance,” said Grant Thornton in a statement.

“Since the period in question, we have invested significantly in our audit practice to better ensure consistent quality and have started to see the material outcome of this investment.”

In November, the firm broke a two-year Big Four monopoly on FTSE 100 audits when it became auditor to cyber security group Darktrace – a move overshadowed by the recent spate of sanctions.

The FRC has also launched investigations into the work of fellow challengers BDO, Mazars and Crowe, further compromising the theory that consistently high audit quality can be delivered by mid-tier firms.

However, the challengers remain optimistic that such quality is attainable and that managed shared audit should still be brought into effect.

“Our analysis and modelling show that, in the absence of joint audit, managed shared audit represents the only way to achieve meaningful reform of the audit market within a reasonable period of time,” said David Herbinet, head of audit at Mazars.

Herbinet also remarked that the approach would allow for “perfectly achievable growth targets for the audit practices of challenger firms”.

Steve Gale, head of audit at Crowe, made similarly optimistic comments, arguing that it will allow larger businesses to “understand the capabilities” of different firms.

“This must be a good way for challenger firms to demonstrate their skills and abilities,” he said, while noting that “appropriate safeguards and clear understanding of the roles and responsibilities of the parties involved” will be critical.

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