In a summary of its final report on the supply of audit services in the UK, the watchdog confirmed that competition is restricted in the audit market due to factors which inhibit companies from switching auditors. Partly as a result of this, auditors tend to focus on satisfying management rather than shareholders, it says.
The Commission's proposed measures include an obligation for the UK’s 350 largest companies to put their statutory audit out to tender at least every 10 years, a dilution of earlier proposals favoured by the watchdog for five-yearly tenders.
No company would be able to delay audits beyond ten years. The Competition Commission said that many companies would benefit from putting their audits out to tender more frequently.
Beefed up audit committee role
Loan agreements binding companies to choose auditors from a pre-selected list or category, which sometimes benefit the largest audit firms – the so-called “big-4” comprising Deloitte, Ernst & Young, KPMG and PwC – will be banned.
The report also proposes beefing up the role of the audit committee and reducing the influence of management, including a stipulation that only the audit committee is permitted to negotiate audit fees and influence the scope of audit work, initiate tender processes, make recommendations for the appointment of auditors and authorise external audit firms to carry out non-audit services.
The Competition Commission will work towards drawing up an order for elements of the remedy package within its purview, and make recommendations for the others. These are expected to come into force from the last quarter of 2014.
The UK watchdog says it will be able to make any necessary amendments to tally with forthcoming EU measures.
EU proposals cap non-audit services
In a qualified majority decision last week (7 October), ambassadors of the EU states backed proposals including a 15-year limit on keeping the same auditor for banks and 'systemically important' companies, and a 20-year limit for other public interest entities.
They also agreed to cap non-audit services at 70%.
The decision opens the way for trilogue negotiations on reform of the audit market between the Council of Ministers, the European Commission and the European Parliament.
The UK argued against mandatory rotation of auditors, opting instead for the tendering process that the Competition Commission has now proposed.
But the European Commission’s original package of proposals for audit reform backed rotation every six years unless there was a joint audit in place in which case the limit would be nine years, and the issue remains a subject for discussion in the trilogue negotiations.