A string of high profile accounting scandals have further fueled concerns about the audit market. A structure change is needed and reviewing alternative structures is a necessary starting point. A pilot on joint audit may provide useful insights to address the current market flaws and persistent audit quality issues.
European Investors/VEB has therefore expressed its support to start pilots on alternative structures, one of which is a joint audit model.
As part of possible measures to enhance audit quality the ‘quartermasters’ (Kwartiermakers) in the Netherlands are now asking market participants’ views on joint audit.
European Investors/VEB has recently provided input to the quartermasters and is open to learn from pilots in this area. In the period ahead, all stakeholders in the audit industry stand to gain from developing a better understanding of the relationship between reforms addressing the structure of the audit markets and audit quality. All this seeks to stimulate a continued important public debate aimed at achieving sustainable and consistent high quality of statutory audits globally.
Read European Investors/VEB position paper on joint audit: VEB – joint audit – discussion paper
A possible measure currently being examined in several countries, including the Netherlands and the United Kingdom, is the introduction of joint audits. This model requires two audit firms to sign off on the accounts of an audited entity.
One of the concerns of the current audit market is the dominance of the Big Four in large company audits and the consequently high market concentration (lack of competition). A joint audit model might increase the number of credible audit firms which in turn could lead to stronger competition and ultimately, better audit quality. This is to be achieved by breaking down the barriers that prevent non-Big Four firms (challenger firms) from auditing large companies.
A different argument often used is that ‘two pair of eyes’ can see more. In a joint audit the two audit firms concerned plan the audit to divide the necessary fieldwork between them and challenge each other. Responsibility for the audit opinion, and audit liability, rests with both auditors. A joint audit regime has been in place for large companies in France for a considerable period of time.
Opponents of this model, on the other hand, point out that a joint audit is not instrumental in improving audit quality. They argue, for example, that joint audit creates the risk of some audit issues falling through the cracks and not being identified by either joint auditor because neither has oversight of the entire audited company.
European Investors/VEB underscores the need for structural reforms in the audit market. In our view, evaluating the impact on audit quality in more detail as well as to include international experience on joint audit is the appropriate thing to do.
The market currently exhibits several deep-seated problems. One of them is the high concentration among four big audit firms resulting in limited choice for larger, multinational audited entities. In general, in such environment, the risk is that the overall output does not serve public needs very well.
Another issue is that audits are being carried out by firms whose main business is not in audit but in non-audit services (M&A, tax, legal, IT) instead.
Auditors are the guardian of companies’ financial statements. They serve to give shareholders and other users of financial statements confidence in the credibility of the accounts.
In the Netherlands, like in other countries such as the UK, auditors must certify that the published numbers give a “true and fair view” of the company’s financial position and its result, that they have been prepared in accordance with accounting standards and that they comply with company law.
But audit is failing to meet investors’ expectations. The most recent study by the Dutch Authority for the Financial Markets (AFM) found that one in every three audits suffered from severe shortcomings and were labelled ‘insufficient’. In addition, the International Forum of Independent Audit Regulators (IFIAR) concluded in its 2019 survey that the percentage audits inspected with one or more significant findings is 33%, down from 47% in 2014. While encouraged by the continuing trend, IFIAR urged audit firms for continuing efforts to achieve improved audit performance.
Major accounting and audit incidents also continue to appear in many jurisdictions. The most recent example being Wirecard in Germany, but other cases such as Steinhoff, Carillion and Toshiba have equally shocked financial markets.
These failures illustrate that the audit market is dysfunctional and a structure change should at least be tested. Pilots on alternative structures, including joint audit, form part of these restructuring efforts. Stakeholders cannot afford not to seize the opportunity to dig into all possible solutions to strengthen audit quality and the consistency thereof.