Managed shared audit, the centrepiece of the UK government’s proposed audit reforms for the country’s largest listed companies, may not be possible due to a lack of stakeholder support, according to Sir Jon Thompson, CEO of the Financial Reporting Council (FRC).
However, rules on capping the market share of the Big Four within the FTSE 350 have been welcomed, said Thompson, speaking at an ICAEW event today.
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“To be open, there are many who consider that managed shared audit might not be capable of being implemented in the UK, but instead they very heavily prefer this market caps idea – the idea that the regulator would limit the Big Four and their share of the market,” Thompson said.
“We’re working through a large number of practical and strategic points, but resolving this is likely to require further work,” he added.
Thompson also said that he had spoken at length with audit committee chairs and other relevant stakeholders, including French auditors who are used to operating under joint audit rules. And while many questions have been worked through, Thompson admitted that further examination is required to determine if managed shared audit is still the appropriate solution.
The Financial Times reported in May 2021 that BDO and Grant Thornton were considering not engaging with the managed shared audits of FTSE 100 companies. When asked about this, Thompson said he was aware there was lots of “chatter” about the proposals, but it was still unclear whether or not the biggest so-called “challenger firms” would engage with the plans.
“It’s not clear to me, but it is part of the conversation that we’re having,” he said.
Instead, Thompson appeared to lean towards going straight to market cap rules.
“Now there are pros and cons to that approach [market cap] too […] In private, we are having some very helpful conversations with audit committee chairs, with companies, with finance directors, and the firms about if we weigh up the pros and cons, which of these is likely to give us a more resilient audit market.”
Ultimately, the question for the FRC is how they could successfully see the challenger firms, namely BDO, Grant Thornton and Mazars, being able to audit the UK’s largest companies and creating choice in the audit market, Thompson said.
The proposed reforms are currently in a consultation period which is due to end on July 8, 2021.
Implementation for the final reforms is not expected until at least December 2023, Thompson said.