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Watch the recording: Managed Shared Audits

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In this recording, Andy Kemp is joined by Jon Holloway, PwC UK's Financial Services Audit Leader, to discuss managed shared audits.

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Andy Kemp: Today, I am here with Jon Holloway, PwC audit partner and member of the audit executive in the final of our in-conversation videos, looking at potential audit reform. Jon and I are discussing the subject of managed shared audits and Jon will share some of his real-life experience in this area. Managed shared audits have been talked about in various forum as a possible way to increase the choice of large company audit firms in the marketplace as it exists today. Almost 100% of the FTSE 350 at the moment are audited by big four audit firms. Managed shared audits would seek to involve non-big four firms in those audits, thereby building the experience of the non-big four firm in auditing the largest company, so they can be a credible choice to audit solely in the future.

Jon, most people are familiar with the concept of joint audit (where the two audit firms together take full responsibility for a company’s audit, and both of them sign the audit opinion) but what are managed shared audits and how do they differ from joint audits?

Jon Holloway: In a managed shared audit, there is one lead firm, one lead audit partner, who takes overall responsibility for the audit and will sign the group opinion. There won’t be two signatures on the opinion like on a joint, just one, and that lead firm will outsource a part of their audit to another firm. That could be the audit of a division or subsidiary, could be in the UK, or could be overseas.

Andy Kemp: Okay, the audit structure is not a new one. Some group auditors already use other firms for some of their subsidiary audits, how would this be different to what we are doing at the moment?

Jon Holloway: Well, in one sense, we do it at the moment quite often, because we often instruct PwC network firms overseas to do large parts of our audits today. As I am sure you know Andy, over the recent years the group auditor has had to increase the amount of oversight and review of the component auditor’s work under the revised ISA 600 auditing standards. And our regulator has also challenged us a lot in this area.

There are also lots of shared audits involving other audit firms happening today, because MFR rules are different across the globe. I have been involved in numerous examples in recent years where either a Big 4 firm or a challenger firm has audited an overseas subsidiary of a client of mine.

However, the difference with the type of managed shared audits that are likely going forward, is that

  • firstly it will be a requirement in the UK to introduce this method and,
  • secondly, it won’t be another big four firm, it will be a challenger firm.
  • And most importantly, if the goal is to increase the experience of a challenger firm, the component that we outsource may have to be a large and complex part of the group that provides exposure of that challenger firm to those charged with governance, and also a component in the UK. That is the biggest prospective change.

Andy Kemp: Thank you, Jon. You’ve had personal experience of this type of model. Based on that experience, what do you think the impact is on the company being audited and also the audit process itself?

Jon Holloway: I’ve seen a number of challenges that will only be magnified as the shared audits grow in size. I won't list them all but here are some examples but here are some:

  1. The two firms will have different audit methodologies - we will need to understand the differences and perhaps require further work of the component auditor
  2. Different IFRS interpretations in certain areas
  3. The use of different technologies to perform the audit - that will make it hard to review work remotely which we take for granted within PwC and would obviously create a huge challenge in the current environment.
  4. Often our clients have shared service centres globally and therefore components/divisions/subsidiaries of those groups share processes and controls cut across them. And so there will be a need for very close coordination between the respective audit firms in relation to that kind of work.

In terms of oversight and review, I think there will need to be far greater time spent leading the audit and overseeing and reviewing the work of the auditor that is being relied upon. This may well extend to the lead auditor performing its independent work at the component or reperforming the work. That will add to quite a lot of cost. It will feel like ISA 600 on steroids. We’ll have to take that level of oversight a lot further.

I think it will be the job of the lead auditor to mitigate the impact on the company. But to the extent that the challenger is auditing a large or complex component then you would expect senior management and those charged with governance to be working with both the lead auditor but also the component auditor as well. And that coordination between management and those charged with governance of the two auditors will be quite challenging to get right.

Andy Kemp: I like that concept of ISA 600 on steroids.That brings it very much to life. As you know only too well, the role of the group team in the supervision of competent audits has increased substantially over the last five years. I suppose, ultimately, in a managed shared audit, you as the signing partner with your name at the bottom of the audit opinion, will have to be just as comfortable with the work of the third-party firm as you would be any other part of PwC. I suppose that will inevitably increase the amount of oversight that you as the lead partner will have to exert on the work done by that third-party firm.

Jon Holloway: Initially, the level of oversight and involvement will be a lot greater than we do at the moment when we are using the work of another PwC firm. The amount of oversight might always be greater, but it should settle down a bit as we get to know the methodologies of the challenger firm, we get to know the people, we establish relationships and we become comfortable with their training, their qualifications, their ability to perform the audit work to a high standard. It should settle down, but initially it will feel very different and we will spend a lot more time overseeing and reviewing their work for sure.

Andy Kemp: We’ve talked about where we might need to spend extra time. What’s your view of what this will do to the cost of delivering and a managed shared audit?

Jon Holloway: Well in my experience, it could lead to a reasonable increase in costs. I don’t have a number for you, but if you think about the type of work that oversight, supervision and review takes, it will generally involve experienced managers and above, relatively expensive time. The level of oversight required by the regulator is pretty significant. Certainly in the first two or three years there will be a reasonable extra cost.

Andy Kemp: One of the main reasons being put forward for managed shared audits is to increase choice. What impact do you think this model would have on audit quality?

Jon Holloway: I don’t think that it will increase audit quality, Andy, but there is a risk that quality might be impaired not least because of the operational challenges of conducting an audit of this nature. But as the lead auditor, it will be our job to make sure it is not, it will clearly be in our interests and in the company’s interest to make sure it isn’t. And as I said, it will come with a cost, because it will require a lot of oversight and a great deal more planning of the overall audit. So there is a risk of a detriment to quality, but we will have to mitigate against it.

Andy Kemp: Okay, thanks Jon. Any final thoughts?

Jon Holloway: If you compare the managed shared audit option with joint audits, joint audits will be more intrusive, and they will be more difficult, more complex. But managed shared audits are still going to be difficult to manage through, it will be very new to us, but we will get used to it, we will adapt, although it will be more expensive.

In terms of choice in the audit market, I don’t see an immediate change in the short-term, either. The challenger of firms will have some resource pressures in coping with the demand depending on how the rules are transitioned in. But over time, looking forward, you can see one or two challenger firms will begin to build capacity and credentials in parts of the market where today they don’t compete, either because they are not able to, or they don't want to. We may find in the future that we have a fifth or sixth competitor in parts of our marketplace.

Andy Kemp: Thank you very much Jon, and certainly lots of food for thought there. If managed shared audits do feature in the consultation document that we are expecting early in the first quarter of this year, I am sure there will be lots of views around how it should be implemented. I would encourage companies to respond and share their views with BEIS when that consultation document comes out.

As always, if you would like to comment or ask any further questions, please reach out to me or your usual PwC contact.

Thank you very much for watching.

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