Auditors to bid for work every five years under new competition rules; but avoid mandatory rotation
ACCOUNTANCY FIRMS will have to compete for the audit work of Britain’s largest listed businesses every five years the Competition Commission said today, although it stopped short of forcing companies to switch auditors.
The requirement for FTSE 350 companies to regularly put their audits out to tender is one of a series of measures laid down by the UK competition watchdog aimed at encouraging greater rivalry between accountancy firms.
The profession was heavily criticised for failing to spot the massive liabilities building up on banks’ balance sheets during the financial crisis, while the so-called Big Four firms – PwC, EY, KPMG and Deloitte – were perceived to wield too much influence over the market and being too cosy with management.
In February, the Competition Commission published findings of its probe into the market, which found that 31% of FTSE 100 companies and 20% of FTSE 250 companies have had the same auditor for more than 20 years and added that the lack of competition leads to higher prices, lower quality and less innovation for companies – as well as a failure to meet the demands of shareholders and investors.
Though it backed away from the more radical plans to impose mandatory rotation, the Competition Commission nevertheless halved the FRC’s recently introduced ten year retendering period to five years, with a deferral period of up to two years in “exceptional circumstances”. The commission also allowed for a five year transition period before the measure comes into full effect.
“More frequent tendering will ensure that companies make regular and well informed assessments of whether their incumbent auditor is competitive and will open up more opportunities for other firms to compete. A more dynamic, contestable market will reduce the dangers that come with overfamiliarity and long, unchallenged tenures,” said Laura Carstensen, chairman of the Audit Market Investigation Group.
The Commission also included a prohibition of “Big Four-only” clauses in loan documentation which can limit a company’s choice of auditors.
Other highlights include changes to a shareholders’ vote on whether Audit Committee Reports in company annual reports contain sufficient information and measures to strengthen the accountability of the external auditor to the audit committee. It also hopes to reduce the influence of management, including a stipulation that only the audit committee can negotiate and agree audit fees and the scope of audit work, initiate tender processes, make recommendations for appointment of auditors and authorise an external audit firm to carry out non-audit services.
“We gave careful consideration to other measures, including mandatory switching, but we think that the measures that we have provisionally chosen will be the most effective and proportionate way to address the problems we have found,” said Carstensen. “We do not see a competition problem with audit firms retaining business if they do a good job-but they will have to demonstrate this on a regular basis.”
The plans will be put out for consultation with final recommendations due later this year.
Last year, the Big Four collected £2.6bn in audit fees, according to the 2103 Accountancy Age Top 50+50 survey.