What could the CMA's recommendations mean for Internal Audit?

The UK's Competition and Markets Authority (CMA) has made a number of hard hitting recommendations regarding external auditors and in particular the largest accounting firms which provide statutory audit services. 

This article considers what the recommendations could mean for internal audit in the future.

Earlier this month the Competition and Markets Authority (CMA) published its recommendationsto address perceived weaknesses in the UK's external audit market. The focus of the report is primarily on the largest providers of external audit services; one of the highest profile recommendations is that there should be an operational split between the largest firms’ audit and advisory practices to remove the potential conflict of interests between the audit and consulting arms.

The Business, Energy and Industrial Strategy (BEIS) committee has gone further, recommending that the audit and non-audit businesses of the 'Big 4' accounting firms should be split completely. The rationale for a more complete split is that partners of firms may benefit from profit sharing arrangements from the other part of the firm if the split is purely operational (and therefore that external audit partners would still benefit from profits earned from consulting services).

These are not the only changes afoot. December 2018's  Kingman Report recommended that the body that regulates external auditors, the Financial Reporting Council (FRC), should be abolished and replaced by a new Audit, Reporting and Governance Authority (ARGA) which will have greater powers than its predecessor. Although some stakeholders had argued that the FRC's successor should not retain responsibility for regulating auditors and setting the UK corporate governance code, this split was not recommended and the proposed new ARGA will retain responsibility for both.

What could this mean for internal auditors?

In theory one could argue that the split of the larger firms would not mean change for internal audit. The recommendations are designed to address the statutory audit market, and not the internal audit profession.

Those organisations with in-house teams will continue as now. Internal audit functions which buy in support (either co-sourced or fully outsourced) will still have access to those services (we should remember at this that there are many providers of internal audit services, not just the large accounting firms). 

However, depending on the way that accounting firms are split (and where internal audit services sit within that), there is a risk for some internal audit functions which use co-sourcing support to bolster the skills of their teams that they may no longer have access to such a wide range of subject matter experts. 

If joint external audits are piloted (as has been suggested), then some internal audit teams could find themselves part of a trial of working with an external audit team comprising team members from two firms. The proposal has been criticised as adding audit burden to businesses.

We must not forget that there are many internal auditors employed by those firms, and as a minimum a split of the firms could potentially mean a change of employer for some of our colleagues. 

What next?

It's not clear when any changes would take place, although some of the Kingman recommendations can be implemented without legislation. Changes that do need legislation passing may be delayed while Brexit continues to dominate the parliamentary agenda.

Meanwhile, The Times reports that some of the firms are considering a legal challenge to the CMA’s recommendations. 

I'll be updating this post as things progress.