The chair of the UK's Competition Commission has said that while it did not conduct a 'root and branch' analysis of the audit market, its latest preliminary findings relating to the dominance of the Big Four audit firms may result in an overhaul of the audit as it currently stands.
In its investigation of the statutory audit services market, the markets regulator made an 'adverse' finding - the implication of this is that it is then bound by law to decide whether it will take further action to remedy the market, mitigate the current situation or prevent the current adverse effect on competition from further detrimental effects on customers, which in the instance of audit, relates to shareholders.
Speaking to Accountancy, Laura Carstensen said that the CC did not think that the audit, in its current form, served the needs of shareholders.
Among the most damning was the report's finding that shareholders played very little role concerning auditor influence, appointments or engagements while at times, 'executive management had incentives to manage reported financial performance to accord with expectations and present accounts in an unduly favourable light'.
The report further stated that 'the incentives on auditors to accommodate executive management included the wish to be reappointed, with the direct benefit of the income of the engagement, and the indirect benefit to reputation and experience that might allow an audit firm to win further engagements'.
Carstensen admitted this could not be termed a 'conflict of interest', however she said: 'The way the system is set up, auditors are behaving rationally and doing what it is they've been asked to do there is a tendency to focus on management's demand. To that extent, we are looking at ways to strengthen the connection between shareholders and their needs, and what it is auditors deliver. We would like to look at ways of feeding shareholder demand more directly into the auditor's formulation of the audit product and service.
'I think the way the system is set up at the moment, is about responding to incentives,' said Carstensen.
She said the Big Four's initial reaction - a strong disagreement with the adverse findings - was 'not unexpected'.
'They now have the opportunity to come back and explain why, in their view, we got this wrong. We're getting into the remedies in this consultation as well, so they will have a good opportunity to come back on this.
'The Big Four will also have an opportunity to appeal the final ruling of the markets' regulator.
'We've some way to go on this yet. The final report will either confirm provisional findings or not. We don't want to prejudge where this may end up. All CC decisions are capable of appeal - I think we're a long way off from there,' she said.
To read the CC summary of provisional findings, click HERE
