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Audit: EU Law

Question for Department for Business, Innovation and Skills

UIN HL7854, tabled on 22 April 2016

To ask Her Majesty’s Government, in the light of EU Directive 2014/56/EU and Regulation 537/2014 on statutory auditing, what assessment they have made of the impact of implementing the provisions relating to joint audit on the creation of a more competitive market and limiting market dominance by the largest professional services networks.

Answered on

9 May 2016

The Government does intend to implement provisions relating to increased tendering as part of the implementation of the EU Audit Regulation and Directive. This is in line with the recommendations of the Competition and Markets Authority (CMA).

The provision on joint audit in the EU Regulation would act as an exemption from having to retender with the frequency envisaged by the CMA. The government consulted on the implementation of the audit directive including this option, and concluded the option should not be taken up.

Joint audit is not a practice followed in the UK, though it is expressly permitted by the Companies and legislation on some other entities. The Department for Business, Innovation and Skills has consulted on whether to take up this derogation. In response to our discussion document in December 2014 on auditor regulation, only 4 of 25 respondents supported its implementation.

It is unclear that increased joint audit would encourage competition. The option in the EU Regulation could result in prolonged audit engagements (up to 24 years) and fewer changes in auditor. This would be contrary to the objective of the CMA and the Regulation, which is to increase retendering and rotation of auditors not less.

The CMA considered the impact of joint audits on competition and concluded that promoting joint audits would have little effect on barriers to entry, expansion and selection. The CMA’s conclusions were based on views provided by a range of stakeholders. The CMA was not able to quantify the potential cost of imposing joint audits, but did state that they believed that across the market the costs would be potentially significant. They state that a lot of weight was placed on the views of investors, who were almost universally opposed to joint audits on the grounds of additional costs and risks to audit quality.

Answered by

Department for Business, Innovation and Skills