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100 Group voices sham tendering fears

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28th Aug 2013
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Finance bosses at the UK’s largest companies have claimed that they don’t understand the Competition Commission’s (CC) mandatory audit tendering proposals to reform the Big Four-dominated market.

Last month the commission said large listed companies should put their audits out to tender every five years in an attempt to encourage greater rivalry between firms.

However according to the 100 Group of finance directors, the CC’s proposed measures would lead to "sham tendering" rather than a more competitive audit market.

FDs at FTSE 100 and large private companies added that forcing companies to put their statutory audit needs out to tender once every five years would also lead to unnecessary costs for businesses and audit firms.

In a letter sent to the inquiry chair, Laura Carstensen, the 100 Group’s Robin Freestone said: “There is a misconception that for a modern large scale business it is possible for an auditor to reach optimal effectiveness immediately upon appointment.

“From a cost point of view, auditors address this by increasing staffing and review processes in the short term. The cost of this tends to be spread over the life of the audit. Accordingly the commercial risk of a mandatory retender would be factored into the cost and borne by shareholders,” Freestone said.

He added there is currently little risk of over familiarity between auditors and members of the company's audit committee due to rules requiring partners dealing with auditors to be rotated frequently.

Companies also value auditors' ability to challenge the management, Freestone said.

“As a result it is very unlikely that frequent tenders are going to result in more auditor rotation as return on such a risk is likely to be negative for the audit committee and its shareholders.

“We would expect every other tender will be academic; merely adding a further tier of cost to the auditing firms and will have a highly disruptive effect on us, as businesses. Hence, one would expect these costs to be far higher than the estimated £30 million mentioned in the report.”

Freestone added that changes to the auditing rules made last year by the Financial Reporting Council (FRC) were “balanced and sensible” and needed further time to become fully embedded in the marketplace.

The FRC currently requires companies to tender their auditing services every 10 years on a ‘comply or explain’ basis.

Earlier this month the FRC spoke out against the CC proposals, which it said would be “disproportionately costly” and could undermine the CC's aims by undermining the serious approach already being shown to last year's changes.

The accounting watchdog also said there was a risk that tendering at five-yearly intervals would result in a “sham process” and would not be taken seriously.

Britain’s biggest banks - including HSBC, Barclays, RBS and Standard Chartered - have been the latest to join the fight against the audit shake-up, saying the new measures would be costly, disruptive and potentially harmful to competition and the quality of oversight.

The CC will publish its final decision by 20 October.

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