Shared audit reforms to be abandoned?

You may be aware that the government was planning to make reforms to the audit market. Back in July 2024, the new Labour government used the King’s Speech to announce it would introduce a draft Audit Reform and Corporate Governance Bill. The Bill has not yet been published, but commentators expected it to impose shared audit requirements on bigger auditing firms. This now looks unlikely.

What were the shared audit proposals?

Currently, the audit services market is dominated by four large firms: Deloitte, KMPG, EY and PwC. Between them, they were responsible for 88% of FTSE 350 audits in 2023. Government was worried that, if one or more of these firms folded, it would have disastrous consequences. As a result, it considered making it compulsory for these firms to share the statutory audit of large companies with smaller auditing companies.

In a nutshell, if one of the ‘Big Four’ was contracted to audit a large company, it would have to share between 10% and 30% of the work with smaller auditing firms.

Is there a precedent?

There is a precedent for shared audit situations. The Institute of Chartered Accountants in England and Wales (ICAEW) points out shared audits used to be common. However, as audit firms have developed international networks, more companies have switched to being audited by a single firm. In some other countries, shared audits are either compulsory or encouraged.

How does a shared audits work?

It’s useful at this stage to make a distinction between a shared audit and a joint audit. In a shared audit, a larger auditor outsources a proportion of the work to another auditor. In a joint audit, two (or possibly more) audit firms have joint responsibility for the entire audit.

Will the reform go ahead?

This is the nub of the issue. While government was expected to mandate shared audits for the ‘Big Four’ firms, it now seems to be backtracking. A government source has told the Financial Times that Business Secretary Jonathan Reynolds is thinking of dropping the shared audit mandate to “reduce costs on businesses”. However, discussions are still taking place with the Financial Reporting Council. So we’ll have to wait for a final decision.

Are shared / joint audits more expensive?

ICAEW says that many large companies believe that shared – and particularly joint – audits will be significantly more expensive. However, the jury is still out. Various analyses have found that additional joint audit costs range from insignificant amounts to more than 25%.

Are shared audits worth it?

There are various pros and cons to shared audits and joint audits. Perhaps the biggest advantage is that a company is audited by two independent firms – the ‘four eyes’ principle. This has the potential to strengthen the quality of an audit. In addition, increasing the use of shared audit and joint audit helps prevent audit services from becoming too concentrated in the hands of too few auditors. Indeed, France has mandated joint audits for over half a century, leading to a more diverse audit market that gives companies more choice.

That said, there are drawbacks other than cost for shared and joint audits. Relatively few smaller auditors have the experience to undertake very large audits. Additionally, audits would need more planning and co-operation, meaning they could take longer. Certainly, for a mandated shared audit system to work, it would need to be phased in over time.

Are you looking for a shared audit?

While shared audit is less common than it used to be, it is still an option. Indeed, at THP we not only act as sole auditor for many medium-sized businesses, but we regularly work with other audit firms as shared or joint auditor for companies with a turnover of up to £1 billion. If you are looking for another auditor to work with, our experienced team can help you. Get in touch today to discuss your requirements.