The Competition Commission (CC) has backtracked on its requirement for companies to tender for a new auditor every five years and instead is calling for FTSE 350 companies to tender every 10 years.
Following a long investigation into competition in the market, the final report published this morning will for many be seen as a victory for the Big Four accounting firms.
The commission claims to have been “listening carefully” to industry feedback over the last two years and decided that 10 years is an appropriate period. However, despite backtracking from its original proposals, the watchdog said it still believes many companies would benefit from going out to tender more frequently at every five years.
The main measures the CC has proposed are as follows:
- FTSE 350 companies must put their statutory audit engagement out to tender at least every 10 years. This differs from guidance introduced by the FRC in 2012, which encouraged companies to go to tender on a ‘comply or explain’ basis. No company will be able to delay beyond 10 years, and the CC believes that many would benefit from going out to tender more frequently
- The FRC’s Audit Quality Review team should review every audit engagement in the FTSE 350 on average every five years. The Audit Committee should report to shareholders on the findings of any AQR report concluded on the company’s audit engagement during the reporting period
- A prohibition of ‘Big Four-only’ clauses in loan agreements (i.e. clauses that limit a company’s choice of auditor to a preselected list or category), although it will be possible to specify that any auditor should satisfy objective criteria
- There must be a shareholders’ vote at the AGM on whether Audit Committee Reports in company annual reports are satisfactory
- Measures to strengthen the accountability of the external auditor to the Audit Committee and reduce the influence of management, including a stipulation that only the Audit Committee is permitted to negotiate audit fees and influence the scope of audit work, initiate tender processes, make recommendations for appointment of auditors and authorise the external audit firm to carry out non-audit services
- The FRC should amend its articles of association to include an object to have due regard to competition
The Office for Fair Trading originally referred the market to the CC back in October 2011. Over the course of the review proposals for five-year tendering were met with fierce criticism from large accountancy firms and experts over concerns that it would not improve quality or increased choice.
James Roberts, senior audit partner at BDO, said they were pleased that the commission has confirmed its findings that the audit market is fundamentally flawed and has largely confirmed the provisional decision on remedies it published in July.
However he added: “The final report does not, of course, reflect the five year tendering proposals in the provisional remedies, instead opting for a maximum ten-year period. But, while some may regard the outcome of the Investigation as being less radical than many would have hoped, the real importance of the investigation has been to shine a spotlight on a previously dark recess of corporate governance. That’s the real victory here.”
ICAEW chief executive Michael Izza agreed that the requirement to tender every 10 years was more in line with the recently introduced 10-yearly tendering on a ‘comply or explain’ basis by the FRC, but that it was regrettable that the commission did not have full faith in the FRC’s requirement.
“We do not think that five-yearly mandatory tendering would have increased choice. Instead what is required is for those that buy audit services to recognise that real quality as well as niche expertise exist also outside the largest professional service firms.
“We would urge businesses to do a broader survey of firms and the capabilities available before determining which their preferred suppliers are for audit and non-audit services,” Izza said.
Grant Thornton chief executive Scott Barnes was more upbeat and said he was pleased to see the CC taking “robust action” to address the identified fundamental flaws in the audit market.
“The CC's remedies have the potential to produce positive change in the market to encourage continued improvement in audit quality and, in turn, the actions have provided a clear connection between auditor, audit committee and shareholder to drive greater innovation and competition in the market,” he said.
The commission will now work towards drawing up an order for those elements of the package it can require and make recommendations for the others, which is expected to come into force towards the end of 2014.