24 October 2021

Concern over capacity issues within the audit sector

The government proposed a number of audit reforms as part of the budget announcement in March 2021 which aim to drive improvements in the sector. However, market participants have warned that the government's goals could remain elusive as audit firms struggle for resources. The work which any business can do is limited by its capacity and audit is no different.

In addition to concerns over capacity at firms, the government's proposals for setting up a new regulator, the Audit, Reporting and Governance Authority (ARGA), have raised further capacity issues. The resources required to fulfil the scope of ARGA as detailed in the whitepaper, are, according to industry professionals "enormous".

"Restoring Trust in Audit and Corporate Governance" is a paper published by the Department for Business, Energy and Industrial Strategy (BEIS) and looks at stepping corporate governance up across a range of areas, which will no doubt be challenging alongside the government proposals and technological changes which are also changing the role of the auditor. Auditors can no longer focus purely on numbers to keep up with the evolving market as so much of a business' value is off-balance sheet.

The skills required to evaluate those non-financial aspects are different to those being offered through traditional audit and accountancy training. The EU Corporate Sustainability Reporting Directive which was introduced in April 2021 is a prime example as it extended the reporting requirements for large companies to include risks to sustainability and the impact on society.

Other proposals to combat the Big Four's dominance, such as the shared audit recommendation where smaller firms would be allowed to work with larger firms have raised questions about their practicality. It seems that the proposals lack clarity, and the industry is finding it difficult to respond to the consultation. Whilst managed shared audit sounds like a good idea in principle, without knowing how it will be implemented, it is difficult to say whether one agrees with it.

The issue of capacity and resources is raised again. In a shared audit, the limited resources of the smaller firm could mean that a senior-junior relationship appears between the principal auditor and the smaller firm. FTSE 350 businesses often have a global reach, and many smaller firms would not be capable of auditing such a business.

In addition, the FRC has plans for separating audit and non-audit services in the Big Four, but it is anticipated that this will also happen to the rest of the market in time, creating further capacity and resourcing issues for firms. If operational separation happens throughout the sector, then it is essentially creating an audit profession which will be entirely distinct from other services.

One cannot ignore the presence of technology in business. Auditors are keen to adopt new technologies, but some of the professional standards to which they are required to adhere are holding them back from being able to use many of the tools which are available, as it would breach the standard. In addition to this, businesses which the auditors are reviewing are using more and more technology and auditors need guidance on how to audit the technologies being used. This also goes back to the issue of skills being required beyond numbers to evaluate the non-financial aspects of businesses.

Ultimately, the idea of change appears to be welcomed by the sector, but with some reservation about how it will be managed and implemented. The overall aim of diluting the Big Four's dominance and paving the way for smaller firms to grow sounds great, provided that the change is supported in the right way.