Companies change many things regularly, including their board, brand, products and services, structure, strategy and IT suppliers. But they are usually reluctant to change their auditor.
Large companies will often keep the same auditor for decades which, according to critics, creates a cosy relationship between auditor and client. Auditors are sometimes scared to tell clients about big problems in their accounts because they are too close to the company and fear losing a big contract, critics say.
From January, companies in the FTSE 350 share index have to put their audit contracts up for tender at least every 10 years, under a new rule by the UK’s Competition and Markets Authority.
However, some large companies have already started to swap their auditor more often, research suggests.
Although 183 companies in the FTSE 350 had not changed their auditor in more than 10 years – and almost a quarter (85) had changed their auditor since 2011, according to research by procurement adviser Proxima.
In the first half of 2014, 46 companies in the FTSE 350 changed their auditor, the research also found. Companies reduced their audit fees by an average of 10% when they re-tendered their audit.
These savings can come from companies “challenging the scope and scale” of an audit, said Richard James, category director at Proxima.
Some parts of an audit, for example of small subsidiaries, may not need to be as detailed as more important parts of the business, potentially reducing audit charges, James said.
The debate and research on audit re-tendering has focused on large companies and the Big Four accounting firms. What about small and medium-sized businesses?
Hypnos Beds, a medium-sized bed manufacturer based in Buckinghamshire, South East England, changed its auditor about four years ago.
The re-tender took six months and switching auditor didn’t save much money. It’s main benefit was a “fresh pair of eyes” on the company’s finances and operations, said Bob Eastoe, Hypnos’ finance director.
“Probably the most valuable thing for our company of a new auditor is spotting potential weaknesses and getting a different assessment of how the business operates.”
Eastoe said he’s happy with its current auditor but may re-tender the audit next year to get a fresh perspective on the business.
Money wasn’t a significant factor in Hypnos changing its auditor but many small and medium-sized businesses are using audit re-tender to try to reduce their audit fees, said Phil Shohet who advises accountancy firms how to run their practice.
One of Shohet’s recent clients at Kato Consulting (which recently merged with Foulger Underwood, an adviser on mergers and acquisitions and strategy) was a top 50 accounting firm, which had bid for an audit contract worth about £1.2m per year.
The incumbent auditor was a top 10 accounting firm. The contract included compliance and consultancy work as well as audit.
Shohet’s client bid £900,000 for the work. The winning firm made a “lowball” bid of just under £600,000.
Audit has been commoditised and many audit tasks are automated. For example, audit firms use software to scan a broad sample of transactions and checks figures add up.
Audit partners have different experience and skills but little changes when a new firm takes over.
“A lot of SMEs don’t value audit,” Shohet said. “They think it adds no value to their business and is [just] a confirmation of what they already knew in their accounts.”
For some accounting firms, audit is almost a “loss leader” that will hopefully lead to more profitable work such as consulting, wealth management and advising on business re-organisations, Shohet said.
About Nick Huber
I’m a specialist business journalist and have a particular interest in tax and technology.