Audit reform stalls, audit evolution continues

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You will have seen, no doubt, that a ‘beefing up’ of corporate governance in the UK is being pared down.

The accountancy, reporting and governance watchdog, the Financial Reporting Council (FRC), said plans to add ‘comply or explain’ on the effectiveness of corporates’ internal controls would be dropped. 

But this current stalling is impacting not only big business, but even accounting practices – ones well below the Big Four. Crucially, missing from the King’s Speech was legislative reform of the watchdog itself: The FRC’s transformation into the Audit, Reporting and Governance Authority (ARGA) was again notable for its absence from the legislative timetable.

ARGA’s creation is seen as crucial in driving competition among the larger audits, alongside increasing quality of the work itself. You will also be aware of the myriad audit cases that the biggest firms have faced in recent years, and have led to the desire for change, so there’s no point in listing them.

Audit: moving on

So, what has changed? Well, quite a lot actually. Firstly, the biggest audit firms have dramatically eased back the number of audits they’re working on (though worth noting they still dominate the FTSE 250 audits).

The impact of them shedding hundreds of audits has been to shower them onto the next tier of firms, and so on. Most small and medium-sized firms offering audit have seen a lot of work come their way.

However, being able to serve this evolved market is becoming very problematic. Namely, several tiers of firms are struggling to manage their audit capacity as work comes to them. We are aware of these firms becoming more selective themselves about the audits they take on – as we’ve already seen from the Big Four - and turning work away.

Resourcing options

The bigger firms have run their own shared service centres for many years. This has not been an economical option for smaller practices. However, select aspects of audit can be outsourced and offshored – it’s an area that more and more of our practice partners are working with us on.

So, while the government and its agencies continue to prevaricate over audit reform, the market is making its own moves.

Vipul Sheth is founder and MD of Advancetrack

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