19 March 2013

FRC responds to Competition Commission's preliminary report on the statutory audit services market

Mandatory Rotation vs Tendering
 
Like the Commission, the FRC believes strongly that companies need to secure the best auditor for their business. For this reason the FRC has promoted regular retendering of the audit. However, the FRC remains concerned that mandatory rotation could have an adverse effect on audit quality, artificially constraining businesses’ choice of audit firm. The FRC also attached importance to retendering being on a “comply or explain” basis. “Comply or explain” allows for flexibility and has allowed the UK’s governance regime to develop further and more quickly than would otherwise be the case. The FRC believes “comply or explain” more appropriately recognises the role of the investor in key governance decisions.
 
Accountability of the auditor to the audit committee and investors
 
The FRC supports the Commission’s goal in trying to strengthen accountability of the external auditor to the audit committee.  Indeed, recent changes to the UK Corporate Governance Code have increased the responsibility of the audit committee and reporting to investors on its oversight of the external auditor. By introducing extended reporting requirements for auditors and audit committees the FRC has increased the extent of matters that auditors are required to report to audit committees as well as extending the matters that audit committees are required to address in their reports to investors. The FRC believes that the recent changes should have time to take effect and would welcome the opportunity to consult with the Commission on what evidence of their impact should be gathered.
 
Audit Quality Review remit
 
Looked at globally, the UK has the highest degree of transparency in reporting publically on the findings of its audit inspection work. The FRC believes that a strong inspection regime is an important component of giving confidence to investors and the response to the Commission agrees that the scope for more frequent AQR inspections (in some cases of higher risk) should be considered as well as more detailed reporting of review findings.

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