Don’t underestimate proposed changes to the UK audit market

THE COMPETITION Commission’s proposals represent a more potent solution than may first meet the eye.

We are very supportive of those remedies that aid competition, increase transparency between auditor and shareholders and, most vitally, improve audit quality.

We think that the moves to increase transparency between the regulator, auditors, audit committees and shareholders are positive – this golden thread between the links in the assurance chain will introduce a greater visibility of audit process and quality than has existed before.

It is particularly positive to see recognition of the importance of the Audit Committee and increased responsibility given to it.

We do believe, however, that there are remedies that require further scrutiny in terms of ease of implementation and cost benefits.

While it is encouraging that the Commission recognises the effectiveness of tenders, and that they are thorough, fair and transparent, we are surprised that after only nine months of the Financial Reporting Council’s (FRC’s) game changing 10-year tendering regime being in place, the Commission has concluded that there is a need to further increase the frequency of tendering.

We are already seeing unprecedented tendering activity.

Ten per cent of FTSE 350 companies have put their audit out to tender in the past two years, with two thirds changing auditor. We expect to see another 50 companies go out to tender this year as a result of the new FRC regime, and 50 to tender audits next year.

It cannot be ignored that there would be a sizeable cost and burden for companies, regulators and firms in implementing some of the proposed remedies and all parties will need to consider carefully the detail around the cost benefit balance in their responses to the Competition Commission.

And so, returning to the vexed issue of mandatory firm rotation.

It is positive to see that after considering the evidence and concerns of market participants, the Commission has rejected this approach, and we agree.

The Commission hasn’t dodged the issue, but focused on competition, quality and transparency, without eliminating choice.

James Chalmers is UK head of assurance at PwC