NOW WE HAVE seen the Competition Commission’s summary findings, it is important to remember that corporate governance has evolved over recent years.
We believe that the Competition Commission has grossly underestimated the influence and effectiveness of the audit committee. The professionalism of audit committees has grown, assisted by aspects of the Combined Code and evolving market practices.
The vast majority now perform a thorough review of external audit quality at least annually. They have also increased the level of reporting of their activities to shareholders, including scrutiny and disclosure of fees paid to ensure they reconcile with the provision of a quality audit.
We seem to be losing sight of the fact that it is in the best interests of shareholders to have a quality audit and not to measure success by change for the sake of change.
In any case, when the elected non-executive representatives see a better opportunity they don’t hesitate to change today. In the last eleven years there has been one change of auditor in the FTSE 350 every month – that’s more than 130 changes and that of course excludes tender activity where the incumbent is judged to continue to be the best provider going forward.
Competition is fierce when it comes to retaining and winning audits and tendering activity is a constant feature of the market. The Competition Commission’s own research states that mid -tier firms are invited to 30% of tenders in the FTSE 350. The reality is that tendering companies are rarely choosing them. This does not make the market anti-competitive; it simply means the buyers of audit services are exercising their right to choose their preferred auditor – a key element of a truly competitive market.
Regulatory pushes, such as those in the Combined Code to drive more regular tendering, make sense. However, portraying them as requiring change as the measure of success does not, as it will jeopardise quality and that cannot be good for anyone, least of all investors.
Richard Sexton, is head of reputation and policy, PwC
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