Could joint audit help improve audit quality and reduce market concentration? Joint audit is a proven means of facilitating the emergence of a diverse audit sector and, in the case of France, has already led to the creation of the least concentrated audit market of any major economy.
If undertaken in a spirit of collaboration, it can reinforce governance arrangements on the conduct of audits and deliver real improvements in audit quality.
What is joint audit?
In a joint audit, two separate audit firms are appointed by a company to express a joint opinion on its financial statements. It is fundamentally different from a ‘dual’ or ‘shared’ audit, whereby one audit firm (or sometimes more) audit parts of a group and report to another audit firm, which ultimately signs off on the group audit. Statutory joint auditors must belong to separate audit firms.
Joint audits usually involve two audit firms, but a small number of companies have decided voluntarily to appoint three audit firms to perform their joint audit.
Joint audit, audit tendering and rotation
The 2014 EU Audit Regulation introduced incentives to encourage the adoption of joint audit by allowing joint auditors to benefit from a longer rotation period (i.e. a maximum tenure of 24 years with no tendering required). By contrast, sole audits are subject to tendering after 10 years and a maximum tenure of 20 years.
The preamble to the Audit Regulation states that: “The appointment of more than one statutory auditor or audit firm by public interest entities would reinforce the professional scepticism and help to increase audit quality. Also, this measure, combined with the presence of smaller audit firms in the audit market, would facilitate the development of the capacity of such firms, thus broadening the choice of statutory auditors and audit firms for public interest entities.
Therefore, the latter should be encouraged and incentivised to appoint more than one statutory auditor or audit firm to carry out the statutory audit.”
Nine-member states have decided to encourage joint audit through an extension of the maximum tenure allowed, including (in addition to France) Germany, Spain, Sweden, Finland, Norway, Belgium, Greece and Cyprus.
Joint audit has long been regarded as a French peculiarity. But in the context of significant corporate failures and unsustainably high levels of market concentration, the UK’s competition regulator, the Competition and Markets Authority (CMA), is now recommending the introduction of mandatory joint audit. In April 2019, it published The Future of Audit report, recommending mandatory joint audit as part of a broader reform package for most FTSE350 companies with at least one of the joint auditors being a non-Big Four auditor.
The benefits of a joint audit
From the company’s perspective, joint audit:
Enables companies to benefit from the technical expertise of more than one firm;
Encourages “coopetition” (cooperation and competition) between joint auditors, resulting in improved quality of service;
Leads to a real debate on technical issues and offers additional scope for benchmarking;
Allows for the smooth and sequenced rotation of audit firms, where appropriate; and
Retains knowledge and understanding of group operations, which minimises the disruption caused when one audit firms are changed.
How joint audit works in practice
The practice of joint audit is well established in France, as it has been a legal requirement there for over 50 years and has gone through several phases of evolution to reach a level of maturity “signed off” by the market.
The following steps explain how the joint audit of consolidated financial statements works for the audit of large French listed groups like BNP Paribas, and how it could work in Ireland and deliver similar benefits. Joint audit of consolidated financial statements is the most common form of joint audit, and a professional French auditing standard exists (NEP-100).
Determine the annual audit approach: the yearly audit approach is jointly determined and includes the preparation of a joint risk-based audit plan. A single set of joint audit instructions (i.e. a manual of the audit procedures to be applied on a coordinated and homogenous basis to the group’s subsidiaries by each joint audit firm or network) is issued.
In practice, both joint audit firms contribute to these documents, which are consolidated before joint approval of the overall audit approach. The audit approach is almost invariably the subject of a combined annual presentation to the group’s audit committee by the joint auditors.
Overall allocation of work between the joint auditors: whatever the basis of appropriation, a balance between each of the joint audit firms is sought. This is provided for by NEP 100, which stipulates that the audit work required should be split between the joint auditors on a balanced basis and reflect criteria that may be quantitative or qualitative. If a quantitative basis is used, the split may be by reference to the estimated number of hours of work required to complete the audit. If a qualitative basis is adopted, the split may be by reference to the level of qualification and experience of the audit teams’ members.
Allocation of work on the different phases of the audit: for the accounts of consolidated subsidiaries, for joint as for single audit, the parent company’s auditors are deployed as widely as possible over its subsidiaries worldwide. The allocation of subsidiaries to one or other of the joint auditors may be based on business, product or geographical location criteria. When geographical criteria are used (countries, zones etc.), each joint auditor is deployed over one or several territories. In the case of significant groups, the joint audit approach is often applied within each of the group’s businesses to ensure oversight by “two sets of eyes” for each business line.
Levels of group audit reporting: up to four levels of group audit reporting are distinguished: individual entities; geographical zones or business lines (aggregating several entities); group financial and general management; and those charged with governance. For individual entities, for example, the auditor in charge of each entity is responsible for reporting the audit conclusions by way of audit summary meetings with the local management and for expressing an audit opinion on the entity’s consolidation package.
The group audit opinion on a joint audit: the joint auditors prepare a joint audit report addressed to the group’s shareholders, which is presented during its annual general meeting. The audit opinion expressed is a single joint opinion. Special provisions exist in the event of disagreement between the joint audit firms as to the formulation of their audit opinion. In practice, they are rarely needed.
Joint and several responsibilities: each joint auditor is jointly and severally responsible for the audit opinion provided. The exercise of joint and several obligations implies that each joint auditor performs a review of the work performed by the other. The sharing and harmonisation of the audit conclusions and the audit presentation prepared for the audited entity constitute the first step in that review. In addition, the audit summary memoranda and working paper files for the engagement are subject to reciprocal peer review.
The two most common criticisms of joint audit relate to the cost and the additional risks involved. However, most of the tasks brought about by a joint audit situation are highly value adding as they are dedicated to the “professional scepticism” necessary to express an audit opinion. In practice, the additional cost is borne by the audit firms involved rather than being passed on to the audited entity.
The main features of a joint audit
The benefits of joint audit
The UK as a benchmark
In 2020/21, the EU audit reform will be up for review. The UK reform will strongly influence the dynamic of this debate. Given the importance of its financial market, decisions in the UK will also have an impact beyond Europe. The Commonwealth countries look to the UK for best practice financial regulation and adopt rules that they consider beneficial for their markets. More countries are therefore likely to seriously consider joint audit as a measure to diversify their audit markets.
Interestingly, on 28 May 2019 the prospect of Ireland preparing a similar report on The Future of Audit was raised at a Joint Committee on Finance, Public Expenditure and Reform. As an audit firm with a proven track record in joint audit, we believe that this is a solution than can provide tangible benefits to all stakeholders.