The UK Competition Commission’s investigation and preliminary report regarding competition between external auditors and the dominance of the Big Four accountancy practices, has generated some controversy. For starters, the Commission has recommended for FTSE-350 companies that there be a decennial re-tendering for external auditors rather than a rotation.
In contrast to a rotation, a re-tendering would not preclude an incumbent auditor continuing its position. It represents a halfway point between the critics of the re-tendering system and the Financial Reporting Council’s (FRC) Audit Tenders Notes on Best Practice, which merely recommended re-tendering but only on a “comply or explain” basis.
The 10-year period is a longstop for the Commission, and it suggests that a company’s audit committee should review and explain why a company does not re-tender on a 5-year basis. To keep relations with auditors more at arm’s length, the Commission recommends that only the audit committee should be involved in negotiating terms and retaining external auditors. Stipulations in finance agreements for a “Big Four only” auditor are to be prohibited but other objective selection criteria can be used.
Shareholders must decide whether audit committee reports are satisfactory, and the FRC must adopt as an objective the necessity of maintaining competition between external auditors. The Commission expects to make an order by the end of 2014, and it recognises that the proposals may be superseded by EU proposals.
The controversy between rotation and retendering was highlighted in the Guardian’s October 28 interview with Olympus’ former CEO Michael Woodford. Based on his own experiences, he strongly advocates rotation, warns about the dangers of perpetual relations with auditors becoming too comfortable and points out that a considerable amount was spent on lobbying against compulsory rotation.
The issue may seem somewhat esoteric ,but the external audit is of critical importance for effective and transparent governance and compliance. Doubtless, the debate will continue with perhaps the Commission’s order being superseded by stricter EU proposals.
Alistair Craig is a commercial barrister practicing in London. He can be contacted here.