Reforming audit will not be easy, but the latest report might be a place to start

Sir Winston Churchill’s 1942 speech about the second battle of El Alamein contained one of his most famous quotes. It was not, he said, the end – nor even the beginning of the end – but it was perhaps the end of the beginning.

One could be forgiven for harbouring similar feelings about the long march towards audit reform.

Last Tuesday saw the publication of a combative report on the future of audit from the Beis Select Committee. ICAEW hosted the chair of the committee, Rachel Reeves MP, when she launched the report with a speech which pulled no punches. She described problems with audit as “profound”, highlighted what the committee saw as a lack of choice and resilience in the market, and criticised failures in regulation and poor performance by auditors. She questioned whether the audit product itself has maintained utility and relevance.

The committee was sceptical about the oft-invoked “‘expectation gap”, but scathing about what they called a “delivery gap”. In other words, audit is sometimes not even doing what it is meant to, let alone what business and wider society would increasingly like it to.

I have said throughout this process that the profession cannot hide or prevaricate. Audit is losing public trust and without trust it cannot function – no matter how much we get right, get that wrong, and we cease to be useful.

So I welcome this report, though it makes uncomfortable reading. It sets the right tone; focusing on improving audit quality, and increasing its value to business and society. Crucially, it demands that all of the various reviews and investigations into audit now under way – by Sir John Kingman, Sir Donald Brydon and the Competition and Markets Authority – work together as a comprehensive, coherent programme for reform.

Reform should be balanced as well as bold: this is clear when considering the complex interplay of independence, customer choice, and market resilience. Discussion of competition invariably revolves around moving “from four to more”. But I do not think enough attention has been paid to the opposite risk, that we might go from four to three or fewer. Many of us are old enough to remember the days before Enron when we had the Big Five – some may even recall the Big Eight.

I am concerned that an enforced break-up of the largest firms will not increase choice. Conversely, it may drive firms out of the market – and discourage others from entering. There is much justifiable anger about audit failures, but we must look at facts. Notwithstanding the importance of statutory audit, for larger firms it is a comparatively small part of their revenue stream – albeit a recurring one – and carries disproportionately large liability.

The audit of large listed companies must attract challengers from the many excellent firms in the next tier, while incentivising incumbents to stay. Audit must also be a career choice which continues to attract and retain the highest quality talent. Full structural separation of multi-disciplinary firms would not help with any of these goals. Even were it only to kick in above a certain threshold, this would effectively penalise growth.

Britain is recognised as leading the world in professional and business services, including audit. At an uncertain time for the UK, this is a vital component of our national industrial strategy. Moreover, while the current focus on the Big Four and the FTSE350 is understandable, we must ensure that we do not make life harder for the many medium and smaller firms providing excellent services in every part of the economy.

But this is caveat, not confutation. The committee’s report is a constructive and influential contribution to the debate about how we modernise audit. To borrow another quote from Sir Winston, if things are right, we must not mind if they are also hard. Reforming audit was never going to be easy. But we may, perhaps, have a good basis from which to start.