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15 October 2013 | Andrew Pring
In a significant watering-down of its original proposals, the Competition Commission (CC) has proposed that FTSE 350 companies must put their statutory audit engagement out to tender at least every 10 years – double its previous five-year suggestion.
The Commission also urges the Financial Reporting Council (FRC) to encourage companies 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.
Laura Carstensen, chairman of the Audit Market Investigation Group at the CC, 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."
Accountants who have been critical of the perceived audit stranglehold exercised by 'big four' firms gave a mixed response. James Roberts, senior audit partner at BDO, said: "We are pleased that the Competition Commission has today confirmed its findings that the audit market is fundamentally flawed and has largely confirmed the provisional decision on remedies it published in July.
"The final report does not, of course, reflect the five year tendering proposals in the provisional remedies, instead opting for a maximum 10-year period. But, while some may regard the outcome of the Investigation as being less radical than many would have hoped, the real importance of the Investigation has been to shine a spotlight on a previously dark recess of corporate governance. That's the real victory here.
"The investigation has led to a much broader debate around the role of the auditor and corporate reporting, which is welcome. But it has also fundamentally altered the view of the market as to what good governance means when it comes to the appointment of auditors. It is this essential shift in attitudes to governance, to reject the notion that an auditor can remain in place for 100 years without a competitive tender, which should bring about real change in the market and encourage genuine and fair competition; more than the changes in the rules which the Competition Commission will impose.”
Grant Thornton, which had not been in favour of a move to five years on the grounds of unnecessary cost and market disruption, welcomed the amended proposals. CEO Scott Barnes said: "The final conclusion of the CC that the UK's large public company audit market has indeed been constrained by anti-competitive barriers to firms.
"The CC's remedies have the potential to produce positive change in the market to encourage continued improvement in audit quality.”