Audit market lacks competition

22 February 2013

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22 February 2013 | Anna Reynolds

A lack of competition in the audit market is likely to lead to higher prices, lower quality and less innovation for companies, and a failure to meet the demands of shareholders and investors.

An investigation by the Competition Commission (CC) found 31 per cent of FTSE 100 companies and 20 per cent of FTSE 250 companies have had the same auditor for more than 20 years, and 67 per cent of FTSE 100 companies and 52 per cent of FTSE 250 companies have the used the same organisation for more than 10 years.

The findings also revealed although auditors are appointed to protect the interests of shareholders, too often their focus is on meeting the needs of senior managers who are the key decision makers on whether to retain their services. The CC warned this means competition in the audit market focuses on factors that are not in line with shareholder demands.

Laura Carstensen, chairwoman of the Audit Investigation Group, said: “Auditors tend to focus on management interests over those of shareholders. For example, management may have incentives to present their accounts in the most favourable light whereas shareholder interests can be quite different.

“It is clear that there is significant dissatisfaction amongst some institutional investors with the relevance and extent of reporting in audited financial reports. This needs to change so that external audit becomes a more genuinely independent and challenging exercise where auditors are less like corporate advisors and more like examining inspectors.”

The findings also highlighted audit firms outside the ‘big four’ – PwC, Deloitte, KPMG and Ernst & Young are struggling to show they have sufficient experience and reputation to be taken on by FTSE 350 companies.

The CC is looking at ways to encourage greater competition through mandatory tendering and rotation of audit firms. It is also exploring the prohibition of ‘big four only’ clauses in documentation when companies are applying for a loan and to strengthen the role of the external auditor to the audit committee.

Carstensen described the proposals as a “challenge” but said greater transparency and extended reporting is needed to provide a better quality of service to shareholders.

The CC surveyed 343 finance directors and chief financial officers and 264 audit committee chairs that were purchasers of audit services. It also conducted case studies of 10 FTSE 350 companies and held hearings with the six largest auditors and four others. Full details of the investigation can be found here.

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