UK Competition Commission: Measures to promote a more competitive audit market

22 July 2013

The CC published a provisional decision regarding the remedies it is considering introducing when it publishes its final report on the supply of statutory audit services to large companies in the UK this autumn. Responses are requested in writing by 13 August, 2013.

In a summary of its provisional decision on remedies, the CC has put forward a package of measures to promote competition and to ensure that competition is directed towards satisfying the demands of shareholders. The remedy package 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 shareholder engagement in the audit process.

The main measures the CC has proposed are as follows:

• FTSE 350 companies should put their statutory audit engagement out to tender at least every five years. Companies may defer this obligation to go out to tender by up to two years in exceptional circumstances. There will be a transitional period of five years before the measure comes into full effect.
• 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 documentation (ie clauses that limit a company’s choice of auditor to a preselected list).
• A shareholders’ vote on whether Audit Committee Reports in company annual reports contain sufficient information.
• 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 and agree audit fees and 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 a secondary objective to have due regard to competition.

The CC has decided against bringing in measures requiring mandatory switching of auditors, further constraints on audit firms providing non-audit services; joint audits; shareholder or FRC responsibility for auditor reappointment or independently resourced risk and Audit Committees.

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