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Competition watchdog unveils audit shake-up

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22nd Jul 2013
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Large listed companies should put their audits out to tender every five years, according to the Competition Commission, which has this morning unveiled its plans to encourage greater rivalry between accountancy firms.

The latest report is a major milestone in a 21-month probe that was set in train by a critical report from the House of Lords economic affairs committee back in 2011. 

The commission has put forward a set of provisional measures which have extended the scope of the Financial Reporting Council’s (FRC) audit reviews. The recommendations have so far received a mixed reaction from across the profession.

The competition watchdog said putting work out to tender more regularly would help break up Big Four dominance in the audit market, however it stopped short of recommending mandatory rotation.

CC Recommendations

· FTSE 350 companies to put statutory audit engagement out to tender every five years

· FRC Audit Quality Review team to review every audit engagement in FTSE 350 every five years

· Prohibition of Big Four-only clauses in loan documentation

· Shareholders’ vote on whether Audit Committee Reports in company annual reports contain sufficient information

· Measures to strengthen the accountability of the external auditor to the Audit Committee

· FRC to amend its articles of association to include a secondary objective to have due regard to competition

The report concluded that five years was an appropriate level for the safeguarding of objectivity and independence, adding that forcing a tender every 10 years was “too long a time for an audit engagement not to be subject to the high level of scrutiny and competition that we found takes place within a rigorous tender process.”

Laura Carstensen, chairman of the Audit Mark Investigation Group, said: “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,” Carstensen added.

However some auditors have already pointed out that the cost of bidding for new contracts could be prohibitive, helping the Big Four capture an even bigger share of the market.

Jez Filley, head of audit at RSM Tenon, said: “We are disappointed that the Commission has chosen not to be more radical and believe that the remedies proposed in the report, are unlikely to address the sector bias towards the Big Four in the short term. 

“We believe that steps to encourage shared audit – where two or more firms together deliver a group’s audit needs – would have provided greater impetus to develop wider competition without adding to the cost of compliance.”

Tony Cates, UK head of audit at KPMG, added: “Five year audit tendering will feel relentless to many companies, audit committees and investors who may only see audit quality damaged rather improved, with the possible end result that the process of tendering becomes an empty box-ticking exercise, rather than a more meaningful, engaged exercise on a 10 year basis.”

The commission proposed that in exceptional circumstances, the companies listed on the FTSE 350 index could put audit work out to tender every seven years.

Michael Izza, chief executive of the ICAEW, 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, which has not had a chance to embed yet,” Izza said.

The report is part of a continuing investigation into the audit market and the plans will be put out to public consultation with final recommendations issued later in the year.

The commission also put forward proposals for a ban on Big Four-only clauses in audit work.

The competition watchdog wants the powers of the FRC boosted by requiring it to review every audit engagement at the top 350 companies roughly every five years.

Shareholders would also have to vote on whether a company's annual reports contains sufficient information.

Earlier this year the commission concluded that the domination of Big Four firms had an adverse effect on competition in the market for listed company audits.

According to the findings the lack of effective competition encouraged corporate auditors to focus more on the interests of the managers who appoint them than the shareholders they are supposed to serve.

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By Robert Lovell
23rd Jul 2013 15:01

Icas director questions watchdog’s plans

The Institute of Chartered Accountants of Scotland (Icas) broadly welcomed the Competition Commission's proposals.

However its director of technical policy, James Barbour, was unsure if it would create a net improvement.

“Some stakeholders will be unsure about the merits of reducing the mandatory retendering period from 10 to five years.

They may question whether the benefits from this proposed change will outweigh the additional costs to be incurred.”

“This proposal has potential cost and resource implications for the FRC. How is this to be resourced?” Barbour asked.

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By DMGbus
24th Jul 2013 13:39

The "cosy cosy" signature selling scenario

According to the findings the lack of effective competition encouraged corporate auditors to focus more on the interests of the managers who appoint them than the shareholders they are supposed to serve.  " "

This is precisely the big issue.

A too cosy relationship between auditors and those who have the most opportunity to commit fraud.

About time it is brought to an end.  A serious cultural change is needed in this respect.

There might be a risk that some auditors consider that their job is to "sell their signature" to what the directors want published.

There might even also be (might have been in the past) auditors who will please directors by rubbishing whilsteblowers legitmate claims about reckless lending in the banking industry.  A misguided idea that public confidence in the bank outweighs public exposure of risks (directors really were well pleased at this, but not shareholders who ultimately paid the price). (**)

(auditors working to please management rather than look after the interests shareholders) (he who pays the piper)

(he who pays = management)

(piper = auditor)

(selling a signature)

(**) a cultural aspect of modern society - maybe I have mis-heard or misinterpreted stories about Hospital inspectors considering that their job was to gloss over / cover up hospital deaths to please management ("piper please don't rock the boat"), resulting in prolonged issues of excessive mortality rates?   Deficient auditing of quality as opposed to deficient auditing of figures.   Both scenarios (if true) would represent corruption in execution - conspiracy to conceal important facts if it really were true.  One scenario (if true) should have lead to Corporate Manslaughter charges, the other scenario (if true) should have resulted in bad auditors paying compensation to shareholders and UK government for losses caused by their deficient work.

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By David Gordon FCCA
24th Jul 2013 15:02

Planet GaGa

 

 My kids tell me that because I am an accountant, I live on a different planet. I think the Competition Commission are the extra terrestrial aliens.

 The reality on the ground is- so far as "Big audits" are concerned;-

 1) 90% of finance directors have to be dragged screaming to the cheque-book in order to pay the "Audit fee".

 2) There is a constant vicious  battle between the "Big" firms to [***] business from each other. Sometimes it gets nasty. (based on comments from KPMG and or Deloittes staff members known to me)

 3) On any audit of substance, never mind a "Big Audit" it may take two or three years to make a profit from the fees because of the time needed just to get to know the client.

 4) More audit "Mistakes" happen because of pressure on the fee /profit ratio, than anything else.

 5) Hundreds of us have relinquished  audit certification because we have opined that we (The seed corn that might have grown into larger audit firms) do not believe that audit work is worth the effort.   The Competition Commission might do better to look into the reasons for this.

 

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By David Gordon FCCA
24th Jul 2013 15:39

Oi! Mr DMG

 

 DMG stop it!

 

 The fact is there are a five figure number of  PLC companies.

 The statistics are that 99.99% behave themselves. I think that the low number of "Problems" each year is a tribute to the general honesty of people.

 In the 52 years I have been in the profession I believe that I have only come across three genuine crooks, and maybe a handful of idiots. The rest I am pleased to say regarded their qualification as hard earned, and not to be compromised for anyone.

 If you live in a world where you perceive everyone round you (Except you) is a "Del Boy" then I am sorry for you, you speak as if you have had an unhappy and or deprived upbringing. That comment is based on thirty years' experience as a youth leader.
 

I was taught that it is sensible to take precautions against improper behaviour, but at the same time to accept people as trying their best to do their job, unless actually individually proven otherwise.

 

 

 

 

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