UK Competition Commission Proposes Shake-up for Audit Work

The UK’s Competition Commission has recommended that the country’s top FTSE350-listed companies should in future put their audit requirement out to tender every five years.

There may also be measures to prohibit firms from only using the ‘Big Four’ accountancy firms in a move aimed to break up their dominance of the industry, as the watchdog outlines its intentions ahead of a document to be issued later this year.

However, following its initial report in February, the Commission has discounted proposals for mandatory switching of auditors.

“This is a comprehensive set of measures that will ensure that shareholders are better served by a more competitive market for statutory audit which is more responsive to their requirements,” said Laura Carstensen, chair of the audit market investigation group.

“More frequent tendering will ensure that companies make regular and well informed assessments of whether their incumbent auditor is competitive and will open up more opportunities for other firms to compete. A more dynamic, contestable market will reduce the dangers that come with overfamiliarity and long, unchallenged tenures.

“We have found that tender processes are thorough, fair and transparent processes which produced effective competition – but we need to see more of them. We think that a five-year period is an appropriate period to subject the engagement to scrutiny and challenge.

“The audit function is too important to be left undisturbed for longer than five years. Audit provides a vital role in providing assurance to shareholders on the reliability and accuracy of corporate reporting and an audit market in which shareholders can have increased confidence will have benefits for the economy more widely. Whilst there are costs involved in going out to tender, we think that they are outweighed by the benefits of a more competitive market in which shareholders can have increased trust.”

Michael Izza, chief executive officer (CEO) of the Institute of Chartered Accountants in England and Wales (ICAEW) said that the institute had long supported a ban of ‘Big Four only’ clauses in contracts, but was less convinced by other proposals. “Whilst there is a desire for greater competition and choice in the audit market, whether or not tendering on a five year basis will help achieve this is open to question,” he commented.

“Regular tendering is good business practice but we need to be mindful of the regulatory burden. There needs to be a balance between the costs and resources required from both businesses and firms when tendering and the desired outcomes.

“It is therefore disappointing that the Commission has decided on more frequent tendering than that now required on a comply or explain basis by the Financial Reporting Council (FRC), which has not had a chance to embed yet.

“We have expressed concern in the past that mandatory audit firm rotation would have unintended consequences in terms of quality, cost and competition. The Commission’s decision not to adopt this reinforces this message.”


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