For some time now, there has been a debate on whether there is an excessive concentration in the audit market. In recent months, as a consequence of scandals in certain audit works and in new reports issued by regulators, this debate seems to be again in the different stakeholders’ spotlight.

According to the last report by the ICAC[1] on the situation of audit in Spain, in terms of the number of audited companies that are listed in the continuous market, in 2018, 86% was concentrated in four firms. In 2016, before the entry into force of the new regulation, which included compulsory rotation, the percentage was of 87%. Among the IBEX 35, only three entities are audited under joint audit (with two audit firms other than the four firms mentioned above).

Beyond our borders, the situation is quite similar: in Germany, 100% of the companies of the main stock index, DAX30, are audited by four firms; in the UK, 100% of FTSE 100 companies and 97% of FTSE 350. In this sense, a few months ago, the British Competition and Market Supervisory Authority (CMA) published a report to carry out an in-depth reform of the audit market and to promote stronger competition. This same objective was one of the basis for the  EU audit reform in 2014[2] , which already encouraged the adoption of joint audit.

Joint audit is the answer

Both the EU and the CMA agree that joint audit can contribute to reducing market concentration. The EU reform already incorporated the option of joint audit, although it required analyzing whether the audit contract’s extension (up to four additional years under joint audit), contemplated by the law in Spain, is sufficient. In addition to reducing the market’s concentration, some regulators understand that quality would be reinforced through joint audit.

Among the measures recommended by the CMA, joint audit would be compulsory for the FTSE 350 companies. In such joint audits, at least one of the auditors must be a firm other than the so-called Big Four. That is to say, the CMA believes that it is necessary to maintain five to seven active audit firms in the FTSE 350 segment at the long term.

If we take a look at the French market, it is worth noting that compulsory joint audit (for entities that present consolidated accounts and financial or investment entities, based on their size) has existed for more than 50 years. For this reason, the audit market in France is less concentrated than in any other EU economy. In fact, in France, 379 different auditors have audit mandates in PIEs (Public Interest Entities)[3] .

Moreover, the three-way relationship between the two auditors and the company can contribute for auditors to be and seem more independent and objective. The presence of two auditors also increases diversity of knowledge and perspectives for the companies’ governance bodies and committees.

Additionally, joint audit can grant higher assurance in the transition between auditors. The change of auditor is always accompanied by a given risk degree in the loss of knowledge. Appointing a joint auditor is a way to counteract this risk: the knowledge and experience is transferred to the new auditor in a structured way.

The most common argument against joint audit is that it could entrail a redundant work and, therefore, increase costs. Nonetheless, a joint audit is not the same audit performed twice. Actually, the two firms distribute the activities to be carried out, and issue a single auditor’s opinion on the consolidated financial statements (performing the appropriate cross-checks). Audit fees in France, in general, are not higher than in other countries.

It seems evident that a firm legislation will be required, both at national and European levels, in favour of joint audit and of an in-depth reflection by all industry actors, in order to increase competition in the audit market. And joint audit per se will not suffice to become prepared for the challenges to be faced by the profession in the future. However, it is a key element for a sustainable reform, aimed at stimulating the competition.

[1] ‘Situation of audit in Spain 2019’, published by the ICAC, on July 2019.

[2]   Directive 2014/56/EU and Regulation (EU) 537/2014, of 16 April 2014.

[3]Monitoring of the statutory audit market Report’, published in France on June 2019 by the High Council of Statutory Auditors.

Article published in the journal Expansion on 12/02/2020 by Antoni Bover, president of Mazars Spain and member of Mazars Group’s Executive Board at international level.

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