Audit Market: Radical Shake Up for The Big Four and End of the Road for the FRC

Tuesday this week saw the publication of two major reports into the audit sector. The Kingman Report looked at the role of the FRC, while the Competition and Markets Authority (CMA) looked at competition and resilience in the audit market.

The reaction from various quarters has been positive. Michael Izza, Chief Executive at ICAEW welcomed them as "landmark reports" saying that the profession really is "at a watershed moment". Bloomberg heralded it as "a big step in reducing accounting firms' conflict of interest". And while the Guardian focused on the fact that the CMA recommendations stopped short of the nuclear option of breaking up the Big Four, Reuters described it as a radical shakeup for the major players.

The big loser is the FRC, which Kingman described as a "ramshackle house" built on "weak foundations". Kingman concludes that the "FRC needs to be replaced with a new organisation with new leadership, a new mission, new powers and new funding".

Meanwhile the language in the CMA report was just as damning, with Chairman Andrew Tyrie, not mincing his words: "Addressing the deep-seated problems in the audit market is now long overdue. Most people will never read an auditor's opinion on a company's accounts. But tens of millions of people depend on robust and high-quality audits. If a company's books aren’t properly examined, people's jobs, pensions or savings can be at risk."

So, what were the main recommendations of each of these two reports?

Kingman Review of FRC:

• Abolition of FRC

  FRC to be replaced with new body tentatively called the Audit Reporting and Governance Authority, with new mission and new powers, operated under new leadership.

• Extended remit for new body

  Enforcement powers to extend to company directors as well as accountants, and to have a role in the appointment of auditors.

• Duty of alert

  Audit firms to have a duty of alert to pre-empt corporate failures.

• Funded by the profession

  New regulator to be funded through a mandatory levy on the audit and accountancy sector.

CMA Market Study

• Split of audit and advisory services

  Either full structural separation or a more cautious approach of separate operating entities, with separate management and accounts.

• Increased scrutiny of audit committees

  Greater scrutiny and accountability for audit committees and their appointment of auditors.

• Joint audit regime

  The imposition of a joint audit regime, whereby FTSE 350 audits would be carried out by two firms, with at least one of those being outside the Big Four.

Both reports are of course advisory, but change is clearly coming, and we now know the likely shape of it. The CMA is seeking feedback on its proposals by Monday 21st January and the Government has already pledged to take forward the recommendations of the Kingman Review. Indeed, on the same day the reports were published, the government also launched the next step – a review into standards in the UK audit market. Led by the outgoing chairman of the London Stock Exchange, Donald Brydon, it will build on findings of Kingman and the CMA.

So, who wins? Clearly the intended winners are the stakeholders of British businesses. The aim is to rebuild confidence in the audit function. But I can't help thinking that if I were a partner in one of those few practices that sit just below the Big Four, I would be rubbing my hands in glee.