The Competition and Markets Authority (CMA) has published the final order that will put into action its remedies for major changes in the UK statutory audit market for large companies to encourage greater competition, which had been delayed pending changes to EU regulation in this area
Under the new rules, FTSE 350 companies are required to put their statutory audit engagement out to tender at least every 10 years and there are a number of measures designed to strengthen the accountability of the external auditor to the Audit Committee and reduce the influence of management. These follow a report by the Competition Commission (CC) into the audit market last year.
The measures will come into force by the end of the year. The CMA says work to finalise the regulations was delayed to ensure harmonisation with the European Commission’s own work to reform the audit market. The EU now requires public interest entities (PIEs) to change their statutory auditor every ten years.
Member states can, however, by way of derogation, permit shorter rotation periods and allow PIEs to extend the audit engagement to up to 20 years provided that retendering takes place at least every ten years.
Laura Carstensen, who chaired the CC investigation, said: ‘It’s vital that shareholders have confidence that auditors are providing an independent and sceptical assessment of a company’s accounts. More regular switching not only opens up the market to greater competition but also reduces the long tenures that can reduce the appearance of objectivity.
‘Our measures to strengthen the role of audit committees will underpin the importance of an external assessment that serves shareholders not management. We’ve seen more companies switching auditor in the last 12 to 18 months than ever before so our measures will ensure that such progress continues and that other mid-tier firms get more opportunities to get a foothold in the market.’
In its final report published in October 2013, the CC found that competition was restricted in the audit market due to factors which inhibited companies from switching auditors and by incentives that encouraged auditors to focus on satisfying management rather than shareholder needs.
Details of the CMA’s order are here: https://www.gov.uk/cma-cases/statutory-audit-services-market-investigation#orders