Page 21 - Patisserie Valerie Teaching Note

the stock exchange, argues Owen Watson. Any company which

wants to list its shares for sale on that exchange must submit

itself to auditing by the exchange’s appointed auditor. The
exchange would then contract with a range of audit firms, large

and small, and rotate as it sees fit. The cost of audit is included

in cost of listing on the exchange. (23)

Companies would pay less in fees based on the outcome of the

audit — which seems fair because if they have better internal

controls and standards then they are less work to audit. (23)

The solution comes in two parts. One is requiring joint audits to

promote competition. Otherwise the Big Four monopoly will
continue. If you had one Big Four firm working jointly with a

non-Big Four firm, the quality of the audit would be enhanced.

Second, audit fees must not be determined by market forces as
these tend to be on a downward trend. Fees must be a function

of balance sheet size and turnover. (23)

Q11 Basically should the big Four be forced to separate auditing

from consulting to avoid any conflicts of interest?

A11 A split would increase competition in the audit market leading

to better quality work.

A break-up would be counter-productive because it would
deprive audit firms of necessary expertise.

Other options to improve audit reliability:

Term limits to changes in who auditors work for.

Q12 Would forcing firms to change their auditors every five years
solve the industry problem?