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Firms worried about UK’s ‘illogical’ audit interpretation

MEMBERS of the profession have raised concerns about how the UK competition watchdog is interpreting aspects of EU audit regulation that must be adopted by 2016.

In response to a UK Competition and Markets Authority (CMA) consultation on a draft order that will implement some of the changes outlined by predecessor body the Competition Commission’s investigation in the UK statutory audit market, the main accounting firms and institutes have warned that some of the arrangements lack clarity and appear illogical.

CMA proposals, the firms have claimed, could result in companies with the shortest audit tenure being forced to tender earlier than companies that have retained their auditors for longer periods.

“This interpretation…would result in unintended, and adverse, consequences for many public interest entities across the European Union,” PwC said.

The CMA, which replaced the Competition Commission and Office of Fair Trading in April, issued the consultation as it attempts to align domestic audit tendering rules with the framework for EU audit reform outlined by the European Council.

Its intention to align UK and EU rules received widespread support, but many have questioned about how the CMA has interpreted provisions about the way audit tenures – and subsequent tendering dates – should be calculated.

Under the proposed transitional provision, which relates to those companies whose auditor has been in place for less than 11 consecutive financial years as at 17 June 2014, some of the companies that fall into this category will be required to retender their audit immediately once the legislation takes effect. Companies with the shortest auditor tenure will be the first to tender as a result.

For example, on one interpretation of the EU legislation, if a FTSE 350 company appointed its auditors in 2005, tendered in 2015 and retained the incumbent, the company would have to tender again only a year later in 2016 in order to extend the tenure of that auditor by up to 20 years, EY said in its response.

“EU legislation looks at tenure periods, not when the last tenure was. That would place a considerable burden on business and raises the question whether this can realty be the intention of the reforms,” EY said.

KPMG also said it failed to understand why the CMA would propose that companies with the shortest audit tenure (under 11 years) have to tender at an earlier date that those with longer tenures.

“Such an approach does not appear to be logical. A more logical approach could be clarifying that the start date of an audit engagement for the purposes of calculating the ‘maximum duration’…is 17 June 2016,” KPMG said.

The CMA is expected to finalise its order in the third quarter of 2014.

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