Note of a roundtable arranged by the Public Interest Committee of RSM Audit UK at 25 Farringdon Street on 30 January 2017


  • Tom McMorrow, Ethics Partner, RSM Audit UK (in the Chair)
  • Sir Ian Byatt, Independent Non-Executive, RSM Audit UK
  • Roger Alexander, Independent Non-Executive, RSM Audit UK
  • Jonathan Ericson, Head of Audit, RSM Audit UK 
  • Jeannette Andrews, Legal and General Investment Management
  • Graham Dale, ICAEW
  • Henry Irving, ICAEW
  • Julie Long (replacing M Babington), Financial Reporting Council
  • Will Pomroy, Hermes Investment Management
  • Kate Jalbert, GES Investment Services
  • Modwenna Rees-Mogg, Angel News
  • Liz Murrall, The Investment Association
  • Roland Bosch, Hermes Investment Management


There was a wide and free ranging discussion on the role of audit arising from the paper, ‘Audit in the Middle Market: The public interest: responsibilities, proportionality & incentives’. Discussion centred on (a) the clients (widely defined), both public and private, of audit; and (b) the issues arising from the concentration of the audit industry around four large firms.

In introducing the paper, Tom McMorrow referred to the many issues now surrounding audit, involving governance, strategy, productivity and proportionality. The key issue was the achievement of audit as a good product with many values and applications.

Objectives of audit and stakeholder clients

The following points were made:

  • Audit works well most of the time, although this is not well recognised. There are, however, some issues to be dealt with.
  • Stakeholder clients look for ethics & honesty rather than precise rules. Audit guards against fraud and supports good governance.
  • The development of private equity in the economy raises new issues of governance and transparency.
  • Clients in different situations require different kinds of audit report. Owners of owner-managed companies without debt and wider ownership will rightly focus on their own key concerns, while investors will be concerned with the position and prospects of widely owned companies. Stakeholder “clients”, with differing expectations can be quite widespread.
  • Objectives of owners of companies would vary and not be solely concerned with profits. Widening expectation, in a changing world, might, however, imply the need for additional checks.
  • To what extent can we rely on markets to satisfy private expectation? It is, of course, not possible to regulate “culture”.
  • Not all companies have sufficient expertise in financial reporting. The role of a Finance Director includes financial management, which goes much wider. Audit Committees with better expertise, accountability, and involvement (critically) in the appointment of auditors, could be more beneficial.
  • Different companies have different information needs. The frequency and timing of reporting is also important. The proximity to investment decision-making is regarded as very important by investors.
  • There is, however, a downside to frequent reporting. As the Kay Report notes, it can lead to concentration on short run measurable results at the expense of longer term objectives and wider outcomes. The emphasis in the new Department for Business, Energy & Industrial Strategy (BEIS) industrial strategy consultation is on long-term value and the conversion of small, existing, companies to larger ones able to contribute more substantially to growth, and is on invoking investor-bodies’ support for that longer-term aim.

Structure of the audit market

  • The audit market has become very concentrated. The dominance of the biggest firms has reduced diversity and choice, and is inhibiting competition. Firms in the middle market are facing an expectation that their fees would be very considerably below those of the market leaders and are therefore reluctant to tender. However, Corporate Reporting Action Group’s willingness to make tendering processes for mid-tier firms proportionate to their size is a very welcome development.
  • Reluctance is exacerbated by the concentration of regulators, notably the Financial Reporting Council (FRC), on the prevention of exit of a big four firm. The outcome of the Competition and Markets Authority (CMA) enquiry had been, moreover, been sub-optimal.
  • The audit committees of many client and potential client companies are not functioning well, often being reluctant to have a proper dialogue with auditors. The appointments to audit committees are crucial.
  • More consideration should be given to how best to encourage entry of new and existing audit firms to wider markets, particularly the segment served by the largest firms. Other audit firms have readily identifiable capacity and capability to service all but the largest entities and over time can develop appropriate brands but this cannot be a rapid process.  
  • Meanwhile, encouragement of entry by the FRC, and avoidance of burdensome requirements on audit could begin to change the climate.  
  • Greater transparency should encourage a wider search for the most suitable auditors. 
  • Mergers and acquisitions activity should provide more competition in the longer term.
  • There is useful scope for appointing separate auditors for the subsidiaries of large companies from those serving the group.
  • Deeper and wider investigation by the CMA seems appropriate. More concentration may have been an unexpected consequence of mandatory rotation.
  • Imposition of additional liabilities on audit, as in the case of financial companies, may be counter-productive.
  • It would help to achieve legislative clarity concerning the Caparo judgment on auditor liability. This could be timely given the expectation of the completion of the FRC report on HBOS later this year. There is also the recent case of BT Italia, which FRC is expected to investigate.
  • If the outcome of the BEIS consultation on Corporate Governance is that the FRC is able to probe the corporate governance arrangements of some private entities, care needs to be taken that the criteria for doing so are less quantitative in nature and more qualitative. Some large private entities are sensitive about translucence of their business models and are entitled to protection against compulsory disclosure.
  • The same consultation may lead to directors coming under FRC jurisdiction (only professionally qualified ones currently are). This would be useful development and rekindle the beneficial results that the former DTI enquiries under (what was) Section 432 of the Companies Act 1985 used to have. When the FRC was set up, this power does not seem to have transferred from Government to it. If the consultation redresses that balance, it would help deal with the ‘regulatory asymmetry’ of the current situation.
  • The new Ethical Standard (in particular, the derogations allowing audit firms to prepare the statutory accounts of ‘SME listed entities’) may help the directors of the entities in that tranche of economic activity to produce better quality financial statements.
  • There may be a case to re-examine the case for ‘safe harbours’ for audit firms to comment meaningfully (ie avoid boilerplate) on companies’ key risks and disclosures, and to document management's response to these comments.  
  • A new regime for professional liability, based on proportionate liability, might be considered afresh by the Law Commissions.
  • The wider SME agenda needs to illuminate the requirement for audit and the regulation of audit needs to have proportionality at its core. The FRC’s role as an improvement regulator has been of huge benefit already and is a model that could usefully be taken forward.

In conclusion, Tom McMorrow thanked participants for their helpful contributions. RSM would find them most helpful in further strategic discussion of the role of audit.