UK Competition Commision Relaxes Audit Stance

UK Competition Commission

OK, I will admit that that is just about the most boring headline possible. Sadly there really is no way to make this important issue gripping in five words or less. But it does matter!

Mandatory audit rotation is a club with which to beat the audit industry about the head. The Competition Commission appears to have realised that mandatory five year rotation of audit firms would not have helped achieve the stated goal of increased competition.

Of course,mandatory ten year rotation isn’t super. It will force more than half of UK businesses to change auditors more frequently than they would otherwise. But the recommendations go further than audit firm rotation, and many of these other recommendations are very good indeed.

Making “Big 4 only” loan covenants illegal is a big step forward, because it implies that a set of objective measures of audit quality can be developed, and that any firm will be able to demonstrate that it is meeting these standards.

Take for example the concept of lead audit partner involvement in the audit. How many minutes of meetings did they attend (internally and with the audit committee)? When were work papers reviewed and signed off? Most observers agree that partner involvement leads to better audits, and these are objective measures of involvement.

Having chosen a measure, we still need to collect that data, establish the correlation we expected to exist, and create a standard level of performance that can be demonstrated.

Lastly, we need a standard way to communicate these performance measure findings to regulators, investors, audit committees, and other stakeholders. Oh, wait, we’ve got that. It’s called XBRL.

The CC also recommended Audit Quality Reviews (AQR) of the FTSE 350 al least once in five years. Lets do the math, that is 70 audits a year. One every four working days? There is no way to accomplish that task without hiring a lot of AQR staff, or automating the process.

The SEC faced a similar mandate in the form of Sarbanes-Oxley, section 408, which required review of the top 500 firms every three years. While the stopgap response was to hire a lot of new staff, the long term solution was automating the process via XBRL data collection.

The same thing is going to have to happen here, except with audit engagement data, not accounting data. But that is fine, because XBRL will work as well for GAAS as it does for GAAP.

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2 thoughts on “UK Competition Commision Relaxes Audit Stance

  1. Good question! To my knowledge, the INT-AR taxonomy has languished, and for the same reasons as the Auditor’s Report taxonomy developed in the US. Without a regulatory mandate, auditors have not chosen to step up and tag their audit reports voluntarily. My previous blog entry, PCAOB: Tag the Audit Report, is a call for exactly that step forward. All kinds of investors rely on the data in the audit report, and it should be tagged.

  2. Do we have any idea of the INT-AR taxonomy? Has anyone touched it in recent years and is it still applicable for the purpose stated in this blog? Perhaps it would be good to revive this one, if applicable.

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