Member Article

Competition Commission proposes audit market shake up

FTSE 350 firms will have to put their audit requirement out to tender every five years, if plans from the Competition Commission go ahead.

There may also be measures to prohibit firms from only using the ‘Big Four’ accountancy firms. in a move aimed to break up their dominance of the industry, as the watchdog outlines its intentions ahead of an Autumn document.

Following an initial report in February, the Commission has discounted proposals for mandatory switching of auditors.

Laura Carstensen, Chairman of the Audit Market Investigation Group, said: “This is a comprehensive set of measures that will ensure that shareholders are better served by a more competitive market for statutory audit which is more responsive to their requirements. More frequent tendering will ensure that companies make regular and well informed assessments of whether their incumbent auditor is competitive and will open up more opportunities for other firms to compete. A more dynamic, contestable market will reduce the dangers that come with overfamiliarity and long, unchallenged tenures.

“We have found that tender processes are thorough, fair and transparent processes which produced effective competition—but we need to see more of them. We think that a five-year period is an appropriate period to subject the engagement to scrutiny and challenge—and it is also aligned with existing FRC guidelines on rotating the Audit Engagement Partner, making it an appropriate time to put the service out to tender.

“The audit function is too important to be left undisturbed for longer than five years. Audit provides a vital role in providing assurance to shareholders on the reliability and accuracy of corporate reporting and an audit market in which shareholders can have increased confidence will have benefits for the economy more widely. Whilst there are costs involved in going out to tender, we think that they are outweighed by the benefits of a more competitive market in which shareholders can have increased trust.”

Ian Morrison, Northern Assurance Leader at PwC, said: “This is a significant package of remedies clearly focused on competition, transparency and quality. The proposed halving of the retendering period from the Financial Reporting Council’s recently introduced 10 year regime to five years is a significant change which will have a major impact on UK companies. It will be critical to get the transition right in order to manage the cost for businesses and potential market disruption. “It is positive to see recognition of the importance of the role of the Audit Committee and the effectiveness of tenders, which the Commission recognises are thorough, fair and transparent. “We have long argued against mandatory rotation because of its adverse effects on competition. After careful and detailed consideration of the evidence and listening to the concerns of the market, the Competition Commission has arrived at the same conclusion.”

Institute of Chartered Accountants in England and Wales chief executive Michael Izza said: “Whilst there is a desire for greater competition and choice in the audit market, whether or not tendering on a five year basis will help achieve this is open to question.

“Regular tendering is good business practice but we need to be mindful of the regulatory burden. There needs to be a balance between the costs and resources required from both businesses and firms when tendering and the desired outcomes.

“It is therefore disappointing that the Commission has decided on more frequent tendering than that now required on a comply or explain basis by the Financial Reporting Council (FRC), which has not had a chance to embed yet.

“We have expressed concern in the past that mandatory audit firm rotation would have unintended consequences in terms of quality, cost and competition. The Commission’s decision not to adopt this reinforces this message.

“ICAEW has long supported a ban on Big 4-only clauses in contracts so it is encouraging that the Commission has included this as one of its proposed remedies.”

This was posted in Bdaily's Members' News section by Tom Keighley .