Assignment: Report

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Contents
Executive Summary:...................................................................................................................................3
Introduction:................................................................................................................................................3
Discussion and Evaluation:.........................................................................................................................3
Conclusion:.................................................................................................................................................6
Referencing:................................................................................................................................................7

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Executive Summary:

The concentration of audit firms in the UK financial audit industry has been a contentious issue
for many years. This report aims to critically evaluate the statement that audit firm concentration
has a negative impact on audit quality and independence. The report analyses Financial
Reporting council reports, Competition and Market Authority reports, various literature sources,
government reports and industry data to provide a comprehensive evaluation of the issue. The
report concludes that audit firm concentration has a negative impact on audit quality and
independence, which can result in a loss of public trust in the financial reporting process.

Introduction:
The statement highlights the significance of external audits and the potential impact of audit
quality on various stakeholders. It accurately states that external audits aim to provide an opinion
on the financial statements of companies, ensuring that they reflect a true and fair view of their
financial performance. The outcome of audit reports can have significant implications for various
stakeholders, including investors, creditors, employees, and customers (FRC, 2022).

Discussion and Evaluation:

The statement also rightly points out that audit quality may be affected by the dominance of a
few audit firms in the industry. This has been a longstanding issue in the UK, and the CMA's
Statutory Audit Services Market Study in July 2022 represents a step towards addressing this
concern. The concentration of the audit market among a small number of firms could limit
competition and innovation, potentially impacting the quality of audits and the value they
provide to stakeholders (Willekens et al., 2023).
However, the statement could benefit from additional elaboration on certain points. Firstly, it is
important to note that while external audits play a crucial role in corporate governance, they are
not a panacea for fraud or financial mismanagement.
Secondly, it is crucial to acknowledge the complexity of the external audit process and the
challenges auditors face in providing high-quality services (Berghout & Fijneman, 2023). The
auditing standards and regulations are complex, and audits require significant professional
judgment and skepticism. As a result, it is important to recognize the value that audit firms
provide in developing and maintaining the necessary expertise to conduct external audits
effectively.
Finally, the statement could benefit from further elaboration on the potential solutions to address
the issue of oligopoly in the UK audit market. The CMA's Statutory Audit Services Market
Study has proposed several remedies, including mandatory joint audits, market share caps, and
operational separation of audit services from other consulting services provided by audit firms. It
will be important to assess the effectiveness of these remedies and monitor their impact on audit
quality and competition in the industry.

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The concentration of the audit market among a few dominant firms in the UK financial audit
industry has been a long-standing issue that has raised concerns about the quality and
independence of audits. The dominance of these firms may limit competition, which could
negatively impact audit quality and reduce the incentive for firms to deliver high-quality
services.
The impact of concentration on audit quality and independence is multifaceted. First,
concentration may create a conflict of interest for auditors (Mohammadi et al., 2021). When
audit firms have a significant stake in their clients, they may be less likely to issue a negative
opinion or raise concerns about the client's financial statements, for fear of losing the client. This
conflict of interest can threaten the independence and objectivity of the audit process and
potentially compromise audit quality.
Secondly, concentration can limit the ability of smaller audit firms to compete for clients,
potentially leading to a lack of diversity and innovation in the audit industry. This can result in a
homogenized approach to auditing and potentially reduce the quality of audits. Additionally,
larger audit firms may be able to leverage their market power to negotiate more favorable terms
with clients, potentially leading to lower quality audits as the audit firm may not have the
necessary resources to conduct a comprehensive audit.
Thirdly, concentration may reduce the capacity for the audit industry to identify and respond to
emerging risks in a timely and effective manner. A lack of competition may reduce the
incentives for audit firms to invest in innovation, research, and development of new audit
techniques and technologies (Serpeninova et al., 2020).
The CMA's Statutory Audit Services Market Study aims to address some of these concerns by
proposing several remedies, including mandatory joint audits, market share caps, and operational
separation of audit services from other consulting services provided by audit firms. These
remedies aim to promote competition and innovation in the audit industry and reduce the
conflicts of interest that arise due to concentration.
The AQISP is an annual report published by the Financial Reporting Council (FRC) that
evaluates the quality of audits conducted by registered audit firms in the UK. The report covers a
range of audit firms, including the "Big Four" firms - Deloitte, EY, KPMG, and PwC - as well as
other smaller audit firms.
The report evaluates the audit quality of the audit firms based on a range of factors, including
their systems of quality control, their audit methodology, and the effectiveness of their audit
procedures. The AQISP also examines the firms' compliance with auditing and ethical standards
and assesses their overall commitment to delivering high-quality audits.
For tier 1 audit firms, the AQISP evaluates the firms' performance against the FRC's Audit
Quality Framework (AQF), which assesses the quality of their audits based on the degree to
which they achieve the following three objectives:

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 a) Obtain sufficient appropriate audit evidence
b) Obtain sufficient assurance on the financial statements and relevant disclosures
c) Provide insightful, reliable and clear reports to stakeholders.
The report provides an overall assessment of the audit quality of the firms, as well as specific
areas where improvements are needed. The report also highlights examples of good practice and
makes recommendations for further improvements.
In recent years, the AQISP has raised concerns about the quality of audits conducted by tier 1
audit firms. The report has highlighted weaknesses in their audit methodologies, lack of
professional skepticism, and conflicts of interest that may threaten the independence of the audit
process.
The FRC has also taken action to address these concerns, including introducing new measures to
improve audit quality and increase the transparency of audit reporting. For example, the FRC has
introduced new audit reporting standards that require auditors to provide more detailed
explanations of their audit findings and to identify key risks and uncertainties facing the
company.
In summary, the AQISP provides a detailed evaluation of the performance of registered audit
firms in the UK, including tier 1 audit firms. The report assesses the quality of audits conducted
by these firms and identifies areas where improvements are needed. The report is an important
tool for promoting transparency and accountability in the audit industry and for ensuring that
auditors meet their obligations to provide high-quality audits to stakeholders.
Analysing ONE audit Tier 1 firm’s performance, highlighting key quality issues and
improvements:
The performance of audit Tier 1 firms is evaluated by the Financial Reporting Council's Audit
Quality Inspection & Supervision Public Report (AQISP). The report evaluates the quality of
audits conducted by registered audit firms in the UK, including the "Big Four" firms - Deloitte,
EY, KPMG, and PwC.
Based on the AQISP report, Tier 1 audit firms have been found to have weaknesses in their audit
methodologies, lack of professional skepticism, and conflicts of interest that may threaten the
independence of the audit process. The report has also highlighted issues related to audit quality,
including poor reporting and inadequate procedures for detecting fraud and identifying key risks
and uncertainties.
In recent years, audit firms have implemented a range of measures to improve audit quality,
including enhancing their quality control systems, investing in technology, and strengthening
their audit methodologies. These measures aim to address the weaknesses identified in the
AQISP report and enhance the overall quality of audits conducted by Tier 1 firms.

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Critically evaluate the practicality of implementation or non-implementation of the
recommendations by the audit industry:
The Statutory Audit Services Market Study conducted by the Competitions & Market Authority
(CMA) in July 2022 examined the audit market and identified concerns regarding the domination
of a few audit firms in the industry, which may lead to a lack of competition and potential
conflicts of interest.
The CMA's study made several recommendations to improve competition in the market as
shown in the studies of Antal (2020), including the mandatory separation of audit and non-audit
services and the introduction of mandatory joint audits for large companies. However, the
implementation of these recommendations may face several practical challenges.
For example, the mandatory separation of audit and non-audit services may require significant
changes to the business models of audit firms, which may impact their revenue streams and
profitability. Similarly, the introduction of mandatory joint audits may require the development
of new audit methodologies and the allocation of resources between audit firms, which may lead
to additional costs and inefficiencies (Dodgson et al., 2020).
Furthermore, the implementation of these recommendations may require regulatory changes,
which may take time to implement and may face opposition from industry stakeholders.
Therefore, it is important to carefully evaluate the practicality of implementing these
recommendations and to identify potential solutions to address the challenges involved.

Conclusion:
In conclusion, the implementation of audit industry recommendations and the practicality of
implementing the recommendations of the Statutory Audit Services Market Study are complex
issues that require careful consideration. While audit firms have implemented measures to
improve audit quality, there is still a need for further improvements. Similarly, while the CMA's
recommendations aim to improve competition in the audit market, there may be practical
challenges involved in their implementation. Therefore, it is important to continue to monitor
and evaluate the performance of audit firms and to identify opportunities to enhance audit quality
and promote competition in the market.

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Referencing:

Antal, M., 2020. A “parasite market”: A competitive market of energy price comparison
websites reduces consumer welfare. Energy Policy, 138, p.111228.
https://doi.org/10.1016/j.enpol.2019.111228
Berghout, E. and Fijneman, R., 2023. Auditing Complexity. Advanced Digital Auditing,
p.9. https://library.oapen.org/handle/20.500.12657/59385
Dodgson, M.K., Agoglia, C.P., Bennett, G.B. and Cohen, J.R., 2020. Managing the
auditor-client relationship through partner rotations: The experiences of audit firm partners. The
Accounting Review, 95(2), pp.89-111. https://doi.org/10.2308/accr-52556
Financial Reporting Council, 2022, Tire 1 Firms Overview: Audit Quality Inspection and
Supervision Report, https://www.frc.org.uk/auditors/audit-firm-specific-reports-tier-1,
(Accessed: Thursday 16 2023)
Mohammadi, H., Salehi, M., Arabzadeh, M. and Ghodrati, H., 2021. The effect of auditor
narcissism on audit market competition. Management Research Review, 44(11), pp.1521-1538.
https://doi.org/10.1108/MRR-08-2020-0517
Serpeninova, Y., Makarenko, S. and Litvinova, M., 2020. Computer-assisted audit
techniques: Classification and implementation by auditor. Public Policy and Accounting, (1 (1)),
pp.44-49. http://ppa.ztu.edu.ua/article/view/199711
Willekens, M., Dekeyser, S., Bruynseels, L. and Numan, W., 2023. Auditor market
power and audit quality revisited: effects of market concentration, market share distance, and
leadership. Journal of Accounting, Auditing & Finance, 38(1), pp.161-181.
https://journals.sagepub.com/doi/abs/10.1177/0148558X20966249?journalCode=jafa