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The UK’s proposed audit reforms could prove a pivotal moment for audit markets around the world, says one peak body.
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UK’s audit reforms could be a ‘watershed moment’ for global markets
23 March 2021
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The wide-ranging proposed reforms aimed at disbanding the auditing and consulting operations of the big four could be a watershed moment for global audit markets, according to Amir Ghandar, reporting and assurance leader at Chartered Accountants Australia and New Zealand.
“The UK government’s long-awaited proposals on improving transparency and risk coverage are a watershed moment,” Mr Ghandar said, “and wide consultation with stakeholders will be a crucial step to refine the recommendations.”
Along with separating the audit and consulting operations of the big four, the sweeping reforms would see the introduction of an audit-share mandate in a bid to break up the dominance of the big four and boost the growth of smaller audit firms, as well as a market cap on the FTSE 350 audits undertaken by big four firms, and a new regulatory body — the Audit, Reporting and Governance Authority (ARGA) — which would replace the current regulatory body and expand its scope.
With a focus on forcing companies to be more transparent about their finances, the proposed reforms are a major step in the right direction, Mr Ghandar said.
“Proposals towards greater accountability for risk management, strong internal controls, tackling fraud, and the resilience of large companies could be major steps forward,” he said.
The UK’s move to crack down on the auditing market follows concerns that similar reforms might take shape in Australia, after recommendations handed down by the inquiry, released in November last year, cast emphasis on ASIC and the Financial Reporting Council to define audit and non-audit categories, and provide clarity on prohibited non-audit services for audit clients.
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The recommendations also called for companies to be forced to go to public tender for auditors every 10 years or offer explanations for not doing so.
While the parallels drawn between the UK’s proposed reforms and recent scrutiny faced by the Australian audit market could make room for action, Mr Ghandar said, there remain acute differences between the UK, Australia, and even New Zealand.
“There’s much to reflect on locally, especially the light approach on internal controls and other areas congruent to the recent Australian parliamentary inquiry report on audit regulation, but equally important to emphasise the Australian, New Zealand and UK market and regulatory contexts are distinct in several key respects,” he said.
It’s a sentiment shared by Tim Kendall, national audit leader at BDO, who said that it might still be too early to predict what the reforms could mean for Australia.
“The situation in the UK is very different to that in Australia,” Mr Kendall said. “Instead of commenting on these specific UK reforms, I think we should wait until we know what the Australian government plans to do in response to the findings that were put forward following the parliamentary inquiry into audit quality.”
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