Editorial by Dr Ilias Basioudis: Letter to the UK parliament on the future of audit

• Published date: 01 July 2020
• Date: 01 July 2020
• DOI: http://doi.org/10.1111/ijau.12180

EDITORIAL

Editorial by Dr Ilias Basioudis: Letter to the UK parliament on

the future of audit

1|INTRODUCTION

This editorial provides my opinion on the topic of the future of audit.

Last January (2019), I was invited and appeared in front of the Mem-

bers of Parliament (MPs) in the UK Parliament to provide oral evi-

dence, as expert witness. The Business, Energy and Industrial Strategy

(BEIS) Select Committee of the UK Parliament investigated the likely

impact of the Competition and Markets Authority (CMA) market

study (reported in December 2018 and October 2018) and the review

of the Financial Reporting Council (FRC) (by Sir John Kingman,

reported in December 2018) in improving audit quality and competi-

tion in the UK audit market.

I should note from the outset that this editorial does not give an

overview of previous works covered in the area, or even a summary

of research in the area or any references.

It clearly emanates from the various inquiries on the future of

audit that have taken place recently (within the last 12–18 months) in

the United Kingdom. This editorial is an amended version of the letter

sent to Rachel Reeves, MP and chairperson of the BEIS Select

Committee in February 2019.

While some topics discussed in my letter are “fashionable”and

obtain an extraordinary amount of attention (for example, non-audit

services), other topics are under-researched or unresearched at all.

Researchers should seek solutions to some of these topics discussed

here and my editorial seeks to stimulate individual and collaborative

research, especially on those unresearched topics.

The amended letter to Rachel Reeves, MP and chairperson of the

BEIS Select Committee in February 2019 follows:

Dear Rachel.

2|REF: BEIS INQUIRY ON THE FUTURE

OF AUDIT

Thank you once more for invitingme to provide oral evidence as expert

witness to the BEIS Select Committee inquiry last month and to con-

tribute to the debate on the futureof the audit in the United Kingdom.

I thought I should write to you to enhance some comments I

made during the hearing last month, but also to note the potential

unintended consequences of other proposals that we didn't have the

time to discuss during the hearing.

I hope this note of mine would make some points clearer but also

offer some other recommendations that you may want to consider.

Let me start by saying that when we state that “the audit market

is broken,”in essence we expect the external audit to provide 100%

guarantee for a company's nonfailure, but the historic audit cannot

really stop fraud or other material misstatements completely.

We need to (re)gain trust in audit, but also trust in business.

However, my belief is that the culture and behaviour and reporting

within companies in the United Kingdom is overlooked, and therefore,

an ambitious and wide-ranging set of reforms/regulations needs to be

created and imposed that will reset our systems of corporate account-

ability in the long-term public interest.

The accounting/audit profession has faced criticism before, but

the current criticisms are not just of audit but also of corporate gover-

nance failings. I believe that we need to focus on both these as well

as the culture and behaviour and reporting within companies.

As pointed out during the hearing, a large number of participants in a

market generally does not guarantee necessarily high competition among

audit firms and lower audit fees paid by their clients/companies. The sad

thing is that there really is not any compelling evidence that Big 4 market

concentration lowers real competition or harms audit quality.

I will point out below some unintended consequences and some

recommendations for each proposal on the table currently, so you and

your committee is aware of those. My comments below are brief and

to the point without any exposition to academic research or detailed

discussion, but if any further clarification is required, I would be con-

tent to provide supplementary information.

3|JOINT AUDITS

Mandatory joint audits can potentially promote audit quality, improve mar-

ket resilience, and protect investors' choice, but, joint audits would increase

audit costs without any assurance that it would improve their quality.

There is mixed academic evidence that joint audits increase qual-

ity, independence, or choice.

Such reform could lead to some issues “falling through the gaps”

and then audit quality may be adversely affected overall.

As I pointed out during the hearing, it is not clear in France

(where this model is already in place) that this has enabled the smaller

firms to take on the larger audits themselves.

Another consideration is this: assuming that audit committees

continue being responsible for the appointment of auditors, they will

need to be arranging a tender process to find a joint auditor, which

might prove more difficult for some sectors than others.

Received: 24 November 2019 Accepted: 27 November 2019

DOI: 10.1111/ijau.12180

Int. J. Audit. 2020;24:181–184. wileyonlinelibrary.com/journal/ijau ©2020 John Wiley & Sons Ltd 181