The UK Competition Commission’s (CC) probe into the audit market was been pushed back twice before its release last week. This doesn’t surprise me at all. I have, for my sins, developed an awareness of the complexity and challenges of describing the audit market. CPA Australia has championed a project mapping this out in the Australian context.

Despite the provocatively titled press release, Audit market not serving shareholders, the Competition Commission’s in-depth probe found no sign of tacit collusion, and found both management and auditors aim to perform their respective functions diligently and effectively. The release brings a new perspective to an old debate and for this reason alone, it is a potentially valuable source for a profession seeking to evolve.

An important aspect of the CC’s release is it highlights the importance of audit committees – an essential part of governance, bringing experience and an intimate knowledge of company business to the oversight of financial reporting and audit. They are best placed to determine the appointment of a suitable auditor, and to decide when the auditor’s tenure should come to an end or be tested by tendering in the market. Audit committees should have a full, unconstrained choice in auditor selection. This is why bank covenants placing restrictions on auditor choice are problematic. For the same reason, "mandatory firm rotation", or time limits decided by law makers in a setting remote from company business have the potential to present an equally problematic disruption to the free deliberation of audit committees.

Preliminary findings in a project championed by CPA Australia to understand trends in the Australian ASX listed audit market over the last decade indicate that the Australian Stock Exchange (ASX) listed company audit market is a competitive, yet complex space. The analysis indicates the existence of a number of sub-markets within ASX listed company financial statement audits, with trends and market dynamics varying across industries, and different levels of company size.

The audit firms participating in the market have clearly evolved to complement the companies they serve. Larger firms tend to audit larger company financial statements, and medium and smaller sized firms tend to audit the smaller and medium-sized company financial statements. While most markets evolve like this, in the audit market it is particularly so, because the scale of audits tends to vary closely with the scale of the client entity.

These findings may seem obvious to the firms and audit partners operating in the audit market, who are aware of its competitive intensity first hand; but they serve as a contrast against some of the assertions made in the debate surrounding audit market regulatory reform. This divergence emphasizes why CPA Australia has set out to promote research in this area.
Starved of genuine facts and analysis, policy debates can go around in circles for years. The debate on audit reform in the EU is a perfect example of this. There is a risk in such debates, that the loudest and most sensational voice can capture the discourse, pushing reforms that impact widely on our economy in unconstructive directions.

The UK developments have also sparked wide discussion of audit market structure worldwide, including in Australia. With this in mind that CPA Australia launched the audit synthesis study project in 2012, funding a team of scholars with an open remit to examine and extend our knowledge on audit market structure in Australia, in conjunction with the Accounting & Finance Association of Australia and New Zealand.

A clear set of facts and objective analysis are critical if policy discussions are to drive worthwhile reforms, or a well-informed decision to stay the existing regulatory course. The academic world has a huge contribution to make to these debates, in the professional and regulatory spheres. Making this link is a perennial challenge, but a crucial objective for the accounting profession and academia to embrace.

Alex’s previous blog post
2013: The road ahead