The Financial Reporting Council (FRC) has updated its notes on best practice for audit tenders, including more emphasis on involving the whole audit committee, early engagement with firms, and the need for a long lead time, in response to companies’ experiences of mandatory rotation and retendering following changes in the regulations
The advice is based on experiences of audit tenders since the requirement was first introduced into the UK corporate governance code in 2012.
The FRC says this has shown the selection process can be time consuming so the regulator recommends involving the whole of the audit committee, discussing with investors which audit firms will be invited to tender, and engaging with firms before the process starts to ensure the right teams are involved.
The FRC held roundtables with the chairs of audit committees that had recently gone through an audit tender process or were about to do so, investors and senior audit engagement partners from the larger audit firms in order to draw up its best practice guidelines.
These highlight a number of areas where lessons have been learnt, including around the timing of a tender. The FRC says the timetable for the change should be on the forward agenda of the audit committee, some years in advance of the requirement to tender or to rotate, and consideration should be given to how this coincides with other factors such as board changes and rotation and retendering requirements throughout the group.
The guidelines contain advice on how to develop and structure the audit tendering process, including how to assess which firms to invite to tender, identifying the need for industry and /or geographic knowledge, and understanding investors’ and regulators’ views of individual firms.
They also discuss how to manage conflicting requirements of different professional services and whether to prioritise audit, as well as the timescales of announcing the audit tender process and other milestones in communicating with shareholders.
The guidelines cover getting the right audit team, and look at ways of exploring the skills and experience needed from an audit engagement partner. They consider a range of decision-making approaches, including whether to give technical challenges, hold meetings with management and assessing the response to the request for proposal. One option is to use a form of ‘speed dating’, where number of different members of management are made available for meetings with the audit teams from each firm.
The FRC says the process should be designed to provide the audit committee with at least two candidate firms with nominated engagement teams that the audit committee consider are good candidates for appointment. The regulator says one of the characteristics of an effective tender process is to build in ‘check-points’ to ensure that the firms are on track to provide credible propositions at the point the decision is made.
To counteract concerns expressed by some audit committee chairs that firms are using ‘star’ audit partners to win audits who are then rotated off the engagement before the end of the five year term or who, in reality, delegate much of the audit activity to another partner, the FRC says committees should consider asking for a commitment from the firm to a five year tenure from the engagement partner and, in future years (when there is more history of tendering), requesting data on the length of time the individual partner has served in audit engagement partner roles.
Melanie McLaren, executive director, audit and actuarial regulation at the FRC, said: ‘In the UK, and now across Europe, testing the market for audit on a regular basis is required. Feedback from companies that have changed auditors since this requirement was introduced, is that there are benefits to be gained from fresh insight. Even if the current firm is reappointed, the experience of the tender process can reinvigorate the audit approach.’
FRC, audit tenders notes on best practice, is here.