Audit committees have been warned they will face extra “pressure” if the government pushes ahead with current proposals to introduce managed shared audit as part of its audit reform agenda.
Managed shared audit would see two audit firms work on a major audit, a lead firm plus a so-called “challenger” firm taking on a “material” segment of the audit work, though the precise details have yet to be made public.
At a special panel discussion, hosted by Board Agenda and Diligent, providers of boardroom software solutions, at the Royal Society of Arts in London, audience members heard that the introduction of managed shared audit would be tricky and place more responsibility on audit committees.
Panel member Tracy Gordon, a director at the Deloitte UK Centre for Corporate Governance, said not all challenger firms were prepared to work on all audits across the range of clients—the FTSE 350—potentially facing mandatory shared audit.
“It’s all very well the minimum standard saying that you need to incorporate a challenger firm, but challenger firms are clear on what audits they want to take on and which ones they don’t,” she said.
“This is putting pressure on audit committees, which is somewhat unfair when not all challenger firms want to be in the tender.”
The introduction of managed audit is designed to increase competition in the audit market. This was a major concern identified—among many—when reviews of audit, the audit market and audit regulation were ordered following the collapse of Carillion in 2018.
It was a review conducted by the Competition and Markets Authority in 2019 that recommended the introduction of “joint audits”—equally divided audit work—that would involve a challenger firm on the audits of all FTSE 350 companies.
However, when the government responded, in its white paper in March 2021, it had placed its support behind the idea of managed shared audits.
Legal reform
Introducing them requires legislation; in recent weeks, despite being under development and discussed for years, it became clear the government would delay bringing forward audit legislation until after the general election, expected some time in 2024.
Rania Bejjani, founder of Bejjani Consulting, a governance advisory firm, said audit committees would face more responsibilities as they attempted to maintain more audit-related relationships and deal with key issues stemming from a restricted pool of challenger firms.
“The second tier [of audit firms] may not have the scale and resource to deal with some of the bigger clients,” Bejjani said. “In principle, it is a fantastic concept, but the practicality of implementation may be complicated.”
Another measure in the reforms is that audit committees must monitor the “independence” of audit firms. Panelist Michael Lucas, co-founder of the Brave risk consultancy, said this would be a complex task.
“It is going to require formalisation around what local [audit] teams can and can’t do.” He added that audit committees would have to “keep track” of relationships and potentially “codify” the information it requires.
As audit reforms have been debated, there has been concern that audit committees could become “boards within boards”, threatening the current structure of UK governance. For Lucas, the issue for audit committees will be skills, especially as they come to terms with demands in new audit committee standards already drafted by regulations but awaiting legislation.
“The challenge is going to be skills,” Lucas said. “Skills are not mentioned in the standard. Financial reporting cannot be the only skill required.”