CC finalises measures to open up audit market
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The Competition Commission (CC) has today published changes that will open up the UK audit
market to greater competition and ensure that audits better serve the needs of shareholders in
future.
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In a summary of its final report on the supply of statutory audit services to large companies in the
UK, the CC has confirmed that competition is restricted in the audit market due to factors which
inhibit companies from switching auditors and by the incentives that auditors have to focus on
satisfying management rather than shareholder needs. The final report follows the provisional
findings report which was published in February, as well as the provisional decision on remedies in
July.
The full final report will be published shortly. All information relating to the investigation can be
found on the audit market home page.
The CC has set out a package of remedies in response to these findings which includes measures
to improve the bargaining power of companies and encourage rivalry between audit firms;
measures to enhance the influence of the Audit Committee; and measures to promote audit
quality and shareholder engagement in the audit process.
The main measures the CC has proposed are as follows:
•
FTSE 350 companies must put their statutory audit engagement out to tender at least
every ten years. This differs from guidance introduced by the Financial Reporting Council (FRC) in
2012, which encouraged companies to go to tender on a ‘comply or explain’ basis. No company
will be able to delay beyond ten years, and the CC believes that many companies would benefit
from going out to tender more frequently at every five years. If companies choose not to go out to
tender this frequently, the Audit Committee will be required to report in which financial year it
plans to put the audit engagement out to tender and why this is in the best interests of
shareholders.
•
The FRC’s Audit Quality Review (AQR) team should review every audit engagement in the
FTSE 350 on average every five years. The Audit Committee should report to shareholders on the
findings of any AQR report concluded on the company’s audit engagement during the reporting
period.
•
A prohibition of ‘Big-4-only’ clauses in loan agreements (ie clauses that limit a company’s
choice of auditor to a preselected list or category), although it will be possible to specify that any
auditor should satisfy objective criteria.
•
There must be a shareholders’ vote at the AGM on whether Audit Committee Reports in
company annual reports are satisfactory.
•
Measures to strengthen the accountability of the external auditor to the Audit Committee
and reduce the influence of management, including a stipulation that only the Audit Committee is
permitted to negotiate audit fees and influence the scope of audit work, initiate tender processes,
make recommendations for appointment of auditors and authorize the external audit firm to carry
out non-audit services.
•
The FRC should amend its articles of association to include an object to have due regard to
competition.
Laura Carstensen, Chairman of the Audit Market Investigation Group, said:
‘Our measures will deliver lasting change in a market where currently a major company putting its
audit out to tender remains unusual enough to be a news story. Instead, all this business will be
open to competition on a regular basis. The introduction of regular and predictable tenders will
benefit shareholders, who will also have a much greater say and knowledge of whether their
needs as customers are being met.
‘Instead of long unchallenged tenures which can reduce the appearance of objectivity and
scepticism essential to an effective audit, there will now be far greater transparency and scrutiny.
‘It will also open the door to other auditors who now have the chance to compete regularly for
business and show they’re up to the mark. This will help them prepare for and counter any
perceived lack of experience, resources and reputation which may have hindered them from
winning FTSE 350 audit engagements in the past. In effect they will more frequently be able to
compete on a level playing field.
‘After listening carefully, in particular to shareholders whose interests have been our main focus,
and the FRC, we have decided that ten years is the appropriate backstop period for mandating
that the audit engagement be put out to tender. Whilst we think many companies would benefit
from a greater frequency of five years (and that an increasing proportion would benefit from going
to tender as the period since the last tender process lengthens), we have accepted that requiring
this in all cases could dilute the benefits we all want to see. However, in keeping with the greater
responsiveness to shareholders we are promoting, companies will be required to spell out when
they next intend to hold a tender process if five or more years has elapsed since the last one.
‘This remedy will be supported with other measures that will empower shareholders and also shift
influence to Audit Committees, so that they can perform their role more effectively in ensuring
external audit works well.
‘The FRC has done valuable work in recent years in assessing audit quality and we feel that
extending this and making it more transparent will further serve the cause of shareholders.
‘If audits and auditors are regularly being called to account, by being answerable to shareholders
and assessed on quality and can be contested by other companies, that will address the concerns
we’ve expressed. We do not think that mandatory switching would add to that, when an auditor
will already have to prove its worth in a competitive tender process run by the Audit Committee in
order to retain the business. Mandatory switching would also reduce choice at such tender
processes.’
The CC will now work towards drawing up an Order for those elements of the remedy package it
can require and make recommendations for the others. It is expected that these will come into
force from the last quarter of 2014.
The CC is aware that its proposed package of remedies may be affected by measures currently
being considered by the EU. However, there are as yet no definitive EU proposals, and we have
therefore proceeded on the basis of the evidence produced by our investigation. The CC will be
able to amend its remedies, if necessary, in the light of agreed EU measures.
The full final report will be published shortly. All information relating to the investigation can be
found on the audit market home page.