UK Competition Commission finalises measures to open up audit market
15 October 2013
The Competition Commission has 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. (Includes FRC comment.)
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:
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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 10 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.
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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.
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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.
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There must be a shareholders’ vote at the AGM on whether Audit Committee Reports in company annual reports are satisfactory.
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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 authorise the external audit firm to carry out non-audit services.
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The FRC should amend its articles of association to include an object to have due regard to competition.
The full final report will be published shortly. All information relating to the investigation can be found on the audit market home page.
Full press release
FRC appreciates the Competition Commission´s concern over the appropriate period within which FTSE 350 companies should tender their audits and has brought it in line with the time period in the Corporate Governance Code.
FRC notes that the summary report recognises the valuable contribution its AQR work makes to audit quality. The proposals relating to that work provide more flexibility on implementation than was originally envisaged and FRC will consider the implications to its resource and funding requirements.
FRC notes the recommendation that the FRC should change its articles of association to have due regard to competition. FRC will consider this carefully in light of its mission and responsibility to promote audit quality.
FRC-press release
Further reporting © The Telegraph: Competition Commission backtracks on five-year audits
© The Competition Commission (UK)
