Sealed bids spell end of price war

Sealed bids spell end of price war

Shareholder demand for audit quality sees FTSE companies take new approach

FTSE350 companies have begun to take secret sealed bids for audit contracts
in the face of warnings the practice could be a threat to transparency.

Sources at some of the country’s largest audit firms have reported that
secret bids ­ audit cost estimates placed in sealed envelopes ­ have been
introduced as a means of ensuring that auditors are chosen on quality alone.

But the practice has been questioned on the grounds that it could be viewed
as making the process opaque.

Michael McKersie, manager of investment affairs at the Association of British
Insurers, agreed that shareholders were more concerned with audit quality than
price, but that the sealed bid practice could work against companies as it
‘created a degree of non-transparency’.

Companies have turned to sealed envelopes in the hope of removing price
considerations from the tendering process. The effort is widely interpreted as
the profession having won the battle to convince companies that the lowest price
is not the best criteria for choosing an auditor.

Company audit committees would view costs only after they have decided which
potential auditor can provide the best quality service.

The introduction of such a practice marks a complete switch from pre-Enron
days where ‘lowballing’ was rife, and many firms used audit as a loss leader to
get into a company to sell other services.

‘It is the first time that I have seen something like this happen,’ said
Richard Bennison, head of KPMG’s audit practice. ‘It was quite an innovative way
of ensuring audit quality was what they were considering.’

‘We are seeing a gradual shift in focus from price to quality, with some
clients choosing firms on quality grounds then negotiating around fees if they
feel they need to,’ said Glyn Barker, UK head of assurance at
PricewaterhouseCoopers. ‘Quality should be the critical factor.’

A raft of financial scandals in recent years, coupled with tougher
regulation, has led to a huge increase in audit fees. Last year lone audit fees
grew for the FTSE100 by 15% .

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