Compulsory audit tenders could cost consumers quality, money and competition

The Competition Commission (CC) has shied away from compulsory auditor switching, instead pushing for mandatory tenders every five years, in an attempt to break up the big four (PwC, Deloitte, Ernst & Young, KPMG).

FTSE 350 companies should put their statutory audit engagement out to tender at least every five years. Companies may defer this obligation to go out to tender by up to two years in exceptional circumstances. There will be a transitional period of five years before the measure comes into full effect.

(CC)

There were fears that compulsory auditor switching would break up well functioning partnerships between firms and auditors. While firms will not now be forced to swith auditors, the tendering process will impose extra costs on firms in the FTSE 350.

ICAEW, a professional membership organisation for accountants, commented on the report:

Regular tendering is good business practice but we need to be mindful of the regulatory burden. There needs to be a balance between the costs and resources required from both businesses and firms when tendering and the desired outcomes.

It is therefore disappointing that the Commission has decided on more frequent tendering than that now required on a comply or explain basis by the Financial Reporting Council (FRC), which has not had a chance to embed yet.

We have expressed concern in the past that mandatory audit firm rotation would have unintended consequences in terms of quality, cost and competition. The Commission's decision not to adopt this reinforces this message.

Laura Carstensen, chairman of the Audit Market Investigation Group, 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.