Audit reform and shaping a sustainable industry

16/02/2020 Mazars holds the fundamental belief that audit forms the foundations of a fair and prosperous world. The practice has always been at the heart of our business – and it remains so.

Our audits bring an independent and critical eye to management and stakeholders, ensuring they have robust controls that support sustainable business growth. Backed by the latest technology, we deliver a customised service that is professional, and committed.

We operate as one team worldwide, bringing together the right people, with the right expertise, at the right time to consistently deliver high quality audits. For each audit engagement, we take the time to understand our client – their business model, culture and environment – and consider the needs of stakeholders, tailoring our audit strategy to the identified risks.

How the audit world turned in 2019

The last 12 months have seen the audit debate around the globe step up a gear. High-profile corporate failures have raised questions around the quality of auditing and shed more light on the need to introduce increased competition and more rigorous reporting to the market.

Mazars continues to promote joint audit as a key solution to these market issues – and we are encouraged by the progress that has been made in the last year, notably in the UK, South Africa and France. In April the UK’s Competition and Markets Authority (CMA) published a report recommending mandatory joint audit as a cornerstone of audit reform. According to the CMA, joint audit is the only proven measure to combat the lack of competition in the audit market of large companies.

Two months later, the French regulator H3C backed up the CMA’s recommendations. H3C confirmed the link between joint audit and market diversity and emphasised the value of a ‘second pair of eyes’ – referring to the continuity inherent in joint audit when, after one auditor rotates off, the other remains in place with existing knowledge of the client. Together, they have created an even more compelling case for the mainstream introduction of joint audit and put pressure on regulators to place their policy firepower behind it.

There is no telling what the next 12 months have in store politically – and how that will play out through audit regulation – but what is certain is Mazars’ commitment to increasing resilience in the audit market for the benefit of businesses and societies around the world.

How significant was the UK CMA report and its findings?

“The CMA delivered a brave and robust set of recommendations based on an extensive analysis of the audit market. The review represents nothing less than the clearest opportunity in decades for real change. It identified that current market concentration – 100% of the FTSE100 and 97% of the FTSE 350 being audited by just four firms – to be unsustainable. To strengthen competition and build a healthier audit market, the CMA recommended a reform package that included making joint audit featuring one firm outside the four main players mandatory for all FTSE 350 companies, with limited exceptions. Maintaining momentum is essential and we will work with our peers to pursue brave solutions and play a role in building a fairer, improved market.”

David Herbinet, Global Head of Audit

What can the ‘French experience’ teach other economies about joint audit?

“France introduced mandatory joint audits more than 50 years ago, which has made it a more diverse market than any other in the EU. Lived experience in France clearly shows that the joint approach results in boosting competition – but it goes even further than that. In fact, joint audit improves quality: by having two auditors in place, it seriously reduces the probability of error, while ensuring a higher degree of independence between the client and the auditors. Finally, joint audits reduce the risk of knowledge loss when changing auditor during a mandatory rotation. The transition is smoother and knowledge can be passed on easily. With their ability to increase competition and quality – and their successful practical application in France for decades – it’s time joint audits were seriously considered as the cornerstone of audit reform within and outside the EU.”

Achour Messas, Partner

Is there an appetite for audit reform in South Africa?

“In South Africa the public and the regulators have found common ground in their concerns around the concentration risk and the dominance posed by the oligopoly of four firms on the market. Lapses of corporate judgement in recent years – played out through unethical business decisions made by large auditors – have united policymakers with the mood on the street. While calls for audit reform are growing louder, Mazars remains fairly alone in its stance on promoting joint audit as the best solution. As such, we are currently assisting the regulator here in drafting a joint audit guide and will be embarking on awareness campaigns. Naturally, regulators in South Africa will be looking elsewhere to find out what works and what does not. Audit reform in other jurisdictions, namely the UK, could certainly act as the catalyst for significant change in the South African market.”

Sanjay Ranchhoojee, Partner

External perspective: challenging the audit status quo

There were a number of high profile financial ‘scandals’ in 2018/19 and, despite many feeling that much of the responsibility for corporate failure lay with directors, auditors became soft targets. In response, politicians worldwide are enhancing regulatory scope and enforcement capabilities. Meanwhile, competition authorities and others – including some investors – are suggesting solutions such as joint audit. Political priorities will of course change and joint audit will face attacks from those who don’t understand its benefits and those with a vested interest in the status quo. Thanks to the depth of its joint audit experience, Mazars is uniquely positioned to work with other firms, investors, the press, and others to facilitate better understanding of joint audit and to keep it on the political agenda so that, ultimately, legislation can be passed to introduce it.

Graham Durgan, Chairman, Emile Woolf International

This article is taken from ‘Striking the Balance: Mazars 2019 Yearbook.’

For more on how Mazars is accompanying our clients’ development and helping them navigate the complex environments in which they operate, download the full Yearbook below.