Business Select Committee launches audit inquiry

At a keynote speech at Chartered Accountants Hall on Monday morning, Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy (BEIS) Committee, will officially launch the Committee’s new inquiry examining the future of audit.

Speaking at the London HQ of the Institute of Chartered Accountants in England and Wales (ICAEW), Rachel Reeves will say that the current audit market is ‘broken’ and that failings in audits, including at Carillion, have helped to undermine public trust in business. Rachel will argue that Parliamentary involvement is needed to give voice to public and shareholder concerns about ineffective corporate governance and ensure that future proposals, including from the current Competition and Markets Authority (CMA) and Kingman reviews into the Financial Reporting Council, are swiftly acted upon.

Speaking ahead of the event at the ICAEW, Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy Committee said: “Misleading audits have been at the heart of corporate failures over recent decades. Recent accounting scandals at BHS, Carillion, and at Patisserie Valerie have shown accounts bearing closer resemblance to works of fiction than an accurate reflection of the true financial performance of the business. Repeated accounting failures have contributed to the collapse of major businesses and undermined public and investor confidence.

“The audit market is broken. The Big Four’s overwhelming market domination has failed to deliver audits which are fit-for-purpose. The lack of meaningful competition has bred conflicts of interest at every turn. The dice are loaded in the Big Four’s favour, as they snap up audit contracts while pocketing huge fees for consultancy work and providing advice on recovering failing businesses.  A host of solutions are now proposed to boost competition and improve audit quality. It’s important that all options are on the table, including measures to break the stranglehold of the Big 4.

“The current inquiries by the CMA and Sir John Kingman are welcome and necessary. But, too often in the past corporate and regulatory failures have been followed by reviews which have been left to gather dust rather than result in concrete action. Our Committee’s inquiry on the future of audit seeks to ensure these reviews are acted upon swiftly and effectively and that they genuinely deliver the improvements to audit quality and corporate governance which businesses, investors, pension-holders and the public expect.”

In her speech on Monday morning, Rachel Reeves will reflect on the regulatory and corporate failures at BHS and Carillion, the company bosses “riding roughshod” over boardroom challenge, and the “concocting of accounts that fooled the markets yet satisfied the auditors”. Rachel will say that the collapse of Carillion implicated the entire audit industry and that doing nothing to fix the ‘broken audit market’ is no longer an option.

Rachel will also criticise the ‘toothless and passive’ record of the Financial Reporting Council, highlighted by a host of corporate and accounting failures, and remark on the FRC’s recent conversion, in the light of the Kingman Review, to a tougher approach to its regulatory role.

The BEIS Committee’s inquiry on the future of audit, which will kick off with public evidence sessions in the New Year, will focus on the likely impact of the CMA market study and the review of the FRC (by Sir John Kingman) in improving quality and competition in the audit market and reducing conflicts of interest. The Committee intends to feed into the CMA study and ensure audit reform is linked to coherent reform of the wider corporate governance agenda.

The Committee intends to begin evidence hearings in January, as soon as possible after the Kingman and initial CMA reports are published.

The Committee inquiry is likely to call witnesses from the Big Four and ‘challenger’ accountancy firms, Audit Committee chairs, CFOs from FTSE350 companies, institutional investors, as well as representatives from the FRC & the ICAEW, outside experts and Sir John Kingman.

Call for evidence - terms of reference

The Committee’s inquiry is inviting evidence on the following questions on the future of audit:

• What is the relationship between competition and quality in the audit market? How should reforms in one area complement the other?
• Do you agree with the CMA proposals (when published)? Will the remedies proposed be likely to increase quality and trust in audits? Are there any potential unintended consequences?
• Do you agree with the Kingman proposals regarding the FRC (when published)?
• To what extent do conflicts of interest undermine trust in audit? How best can they be removed or mitigated?
• How important to the quality of audit is the relationship between auditor and audited company? How can we ensure that there is the right level of challenge? What role should shareholders have in ensuring high quality audits?
• Are the proposed reforms of audit consistent with other recent reforms of corporate governance? Are there any other consequential reforms required?

As part of this inquiry, the Committee will consider the published submissions from the CMA’s market study of the audit sector. Existing submissions to the independent review of the FRC, conducted by John Kingman, are welcome, alongside further responses to the questions above.

Closing date for written submissions is Friday 11 January 2019.

Editor’s notes

Rachel Reeves MP, Chair of the BEIS select committee, is speaking at Chartered Accountants Hall on 12th November to talk about audit reform, trust in business and corporate governance.

Rachel’s speech begins at 9.30am. Media wishing to attend the event on Monday should contact Natalie Bruce Natalie.Bruce@icaew.com The speech is also being live-streamed. Bookmark this page and return on the morning of 12 November.

Rachel Reeves will be available for interview after the speech. Please contact Gary Calder, BEIS Committee media officer to arrange calderg@parliament.uk /020 7219 7556

Committee Membership: Rachel Reeves MP (Chair) (Lab, Leeds West) Vernon Coaker MP (Lab, Gedling) Drew Hendry MP (SNP, Inverness, Nairn, Badenoch and Strathspey) Stephen Kerr MP (Con, Stirling) Peter Kyle MP (Lab, Hove) Mr Ian Liddell-Grainger MP (Con, Bridgwater and West Somerset) Sir Patrick McLoughin MP (Con, Derbyshire Dales), Albert Owen MP (Lab, Ynys Môn), Mark Pawsey MP (Con, Rugby) Antoinette Sandbach MP (Con, Eddisbury) Anna Turley MP (Lab, Redcar).