FRC audit rules should have been given time to take root

MUCH LIKE TRAVELLING ON THE TUBE during last week’s soaring temperatures, the Competition Commission’s 18-month investigation into the large company audit market involved much sweat, frustration and toil with very little discernible reward.

On Monday, the UK competition watchdog came out with its much-anticipated remedies to break the Big Four’s vice-like grip on the FTSE 350 audit market. In this regard it has summarily failed in its raison d’etre of stoking more rivalry between the firms.

Indeed, I have more chance of opening a can of baked beans with my teeth than its remedies have of opening up the market to more competition. Though there are some notable improvements to the current system, much more would have been needed to affect real change.

Forcing major-listed companies to allow auditors to bid for their work every five years will prove costly to businesses and firms, and could end up as little more than a box-ticking exercise for those involved if the incumbent is reappointed.

With Land Securities using just one auditor for its entire 69-year history until it switched to EY earlier this month, five years does not sound a long time. Arguably, it will take auditors of the more complex financial institutions two-to-three years just to get up to speed with the businesses they will audit.

The commission was right to backtrack from imposing mandatory rotation; an approach that no-one in the profession wanted, that has since been discarded by the US and heavily watered down in Europe. But it could have formed some kind of backstop to the ten-year comply or explain tendering approach recently adopted by the FRC.

In fact the FRC’s approach appears to have been working and should have been given more time to bed in. Particularly as the commission has told the FRC to play a more involved role by reviewing every audit engagement in the FTSE 350 every five years and make fostering competition its “secondary objective”: something to which the FRC is heavily opposed.

Nor is it the role of the FRC to open up the market to competition. That is the job of the Competition Commission. What it has achieved by ramping up the rate of audit reviews is to ensure more scrutiny will be placed on audit quality, which is no bad thing.

The Commission has managed to sweep away some of the most anti-competitive elements of the market, such as scrapping the use of Big-Four-only clauses in loan documentation, while enhancing the role of audit committees in setting and negotiating contracts which will go some way to curtailing the cosy relationship between management and auditors.

But, by leaving out provisions to restrict the supply of non-audit services by the auditor and watering down much of the proposals it originally floated back in February it is hard to see how the market can be effectively opened up.

The measures are now out for a final round of public consultation but don’t expect any changes. The stakeholders that hold the strongest sway – auditors, investors and institutes – have already had their say.

As with similar remedies taking shape in Europe, the commission has bowed to intensive pressure and lobbying from the profession. And while the reforms are the most radical to be enforced on the audit market in decades, it is hard to believe that they have gone far enough to upset the Big Four apple cart.

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