Competition Commission calls for five year audit tendering

The Competition Commission's (CC) provisional proposals for reform of the audit market call for more frequent tendering, extending the scope of the Financial Reporting Council's (FRC) audit reviews and strengthening the role of the audit committee, but rejects mandatory audit rotation or a ban on non-audit services.

Details of the main measures are published today and introduce a requirement for FTSE 350 companies to put their statutory audit engagement out to tender at least every five years, which can be deferred by to two years 'in exceptional circumstances'. There will be a transitional period of five years before this obligation comes into full effect.

The watchdog wants the FRC's Audit Quality Review (AQR) team to review every audit engagement in the FTSE 350 on average every five years and says the AQR should review and report on the larger mid tier firms on an annual basis.

The audit committee should report to shareholders on the findings of any AQR report concluded on its company during the reporting period, stating the grade awarded and detailing how both the committee and auditor are responding. The CC also wants a shareholder's vote on whether audit committee reports in company annual reports contain sufficient information.

The CC says it wants to increase the influence and responsibilities of the audit committee. The provisional remedies stipulate that only the audit committee should be permitted to negotiate and agree audit fees and 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.

The CC wants the FRC to amend its articles of association to include a secondary objective to promote competition between audit firms. Outline details of this proposal were released last month, when they were rejected by the FRC as ineffective and costly.

While the proposed remedies also include a prohibition on 'Big-4-only' clauses in loan documentation, the CC says it has decided against bringing in measures requiring mandatory switching of auditors.

Laura Carstensen, chairman of the CC's Audit Market Investigation Group, said: 'We do not see a competition problem with audit firms retaining business if they do a good job-but they will have to demonstrate this on a regular basis.'

The CC has also ruled out several other options including preventing on audit firms from providing non-audit services; joint audits; shareholder or FRC responsibility for auditor reappointment or independently resourced risk and audit committees.

The CC estimates the measures will add some additional costs to companies and firms, which it puts at less than £30m per year when the tendering requirements come into full effect, and less during the initial five-year transitional period.

Carstensen said: '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. 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.'

The CC is asking for feedback on the provisional remedies by 13 August 2013 and respondents should email The CC proposals are available HERE

The final report is due by 20 October 2013.

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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