Leader: Audit competition drives change, not necessarily quality

SO, mandatory audit tendering has been enacted by the EU, with an estimated £10bn of work up for grabs.

Following the amount of noise on the future of audit that has, frankly, not stopped since Enron’s collapse and subsequent reports (DTI/FRC Oxera report) and market investigations (EU), the new audit directive has come into force rather quietly.

Of course, the direction of travel has been well trailed, and major listed corporates have been indulging in auditor-swapping for the last couple of years.

However, that audit swapping has not necessarily ‘increased’ competition – in the wider sense at least – with BDO and Grant Thornton (the market participants with the most to gain in terms of number of audits) holding fewer FTSE 350 audits than a year ago.

The other beneficiary of increased competition should be the markets themselves – in the sense that the EU sees increased audit quality as a by-product of increased competition.

In reality, the consequences of these initiatives are likely to be squeezed margins on audit work as the cost of tendering increases; lack of competition on some audits due to audit firms being more strategic, AKA choosy, about which audits they apply for; and staff being poached where they have particular areas of audit expertise that are coveted by a rival firm.

Blocking certain non-audit services that can be undertaken by the audit firm certainly makes life more interesting, and is an area that BDO and GT in particular will want to see traction in working on big company, lucrative, contracts.

But how this increases audit quality, well, it’s hard to tell.

As directors cannot abdicate responsibility for their business, and auditors only realistically able to provide some assurance based on a snapshot of a company’s financial and risk position, the markets will have to accept that the fundamental purpose of audit is limited in scope.

Kevin Reed is head of editorial of Accountancy Age and Financial Director