Commission’s ten-yearly tendering is a “sensible outcome”

17 Oct 2013

FTSE 350 companies must put their statutory audit engagement out to tender at least every ten years. So says the Competition Commission in their report – parts of which will become law in 2014.

The commission’s investigation into the audit market and its resulting conclusions numbers over 400 pages and contains a wide range of recommendations that aim to “better serve the needs of shareholders in future”.

The independent body’s investigation concluded that adverse competitive effects existed in this market, and that therefore a package of remedies should be implemented. Laura Carstensen, Chairman of the group, described the finalised changes as increasing the opportunity for shareholders and regulators to hold auditors to account. She added that “our measures will deliver lasting change in a market where currently a major company putting out its audit to tender remains unusual enough to be a news story”.

Over the two-year consultation process, some of the commission’s various considerations and proposals, including mandatory firm rotation and five-yearly tendering, generated significant concerns from many stakeholders, who regarded them as damaging to audit quality and not proportionate or cost-effective.

The final proposal, for mandatory re-tendering every ten years was received positively, with PwC’s UK head of assurance, James Chalmers calling it “a sensible outcome…that will enhance competition, transparency and quality”.

The measures proposed also include:

  • the prohibition of ‘Big-4 only’ clauses in loan agreements,
  • the FRC review of every FTSE 350 audit engagement on average every five years,
  • a shareholder vote at AGMs to deem the Audit Committee (AC) Report satisfactory or otherwise
  • measures to strengthen the accountability of the external auditor to the AC and reduce the influence of management on the auditor
  • an amendment to the FRC articles of association to include an objective to have due regard to competition

“We are pleased that the Competition Commission has ruled out mandatory firm rotation, joint auditing and further restrictions on non-audit services, which would have been detrimental to competition and audit quality” said Mr Chalmers. He added that “our focus is to work with investors, companies and regulators to ensure the audit is a hallmark for trust in business.”

The commission will now work on drafting an Order for those measures it can require, and will make recommendations for others. The changes are likely to come into force in Q4 2014.