U.K. to Make Companies Tender Their Audits Every 5 Years
By Kiel Porter & Jim Brunsden - Jul 22, 2013 9:16 AM ET
British antitrust regulators said large companies should be required to put their auditing contract out to tender every five years in a move that falls short of proposals from the European Union to spur auditor competition.
The requirement to tender auditing contracts every five years should apply to companies in the FTSE 350 Index, the U.K. Competition Commission said in a statement today as it published its provisional remedies for the industry.
The regulator stopped short of proposing that companies be forced to switch auditors, a move it was considering in February. The 16-month probe focused on KPMG LLP, Deloitte LLP, Ernst & Young LLP and PricewaterhouseCoopers LLP, the “big four” companies that are also at the center of an EU effort to increase competition in the industry.
“A more dynamic, contestable market will reduce the dangers that come with over-familiarity and long, unchallenged tenures,” Laura Carstensen, chairman of the commission’s audit market investigation group, said in the statement. “The audit function is too important to be left undisturbed for longer than five years.”
Regulators embarked on wide-ranging reviews of audit rules following the collapse of Lehman Brothers Holdings Inc., which the European Commission said raised doubts about the quality of company audits. Regional arms of the top four accounting firms have a market share that exceeds 85 percent in the majority of EU nations.
The U.K. plan for mandatory tendering “gives rise to a substantial incremental cost — far higher than the estimated 30 million pounds ($46 million) — and could have a highly disruptive effect on business,” Simon Collins, U.K. chairman of KPMG, said in an e-mail.
The competition commission’s decision to hold back from requiring mandatory rotation of auditors means its proposals fall short of draft EU plans.
Under proposals made in 2011 by Michel Barnier, the EU’s financial services chief, banks, insurers and listed companies would be required to rotate the audit firm they use every six years, with a four-year gap before the firm could be rehired. The rotation period could be extended to nine years if a company uses more than one auditor.
Barnier’s proposals must be approved by national governments and the European Parliament to take effect. His approach faces opposition from lawmakers concerned that the measures may force companies to use auditors that don’t have the full confidence of investors, so driving up corporate funding costs.
“Mandatory audit firm rotation would have unintended consequences in terms of quality, cost and competition,” Michael Izza, chief executive officer of the Institute of Chartered Accountants in England and Wales, said in an e-mail. “Regular tendering is good business practice but we need to be mindful of the regulatory burden.”
In an initial vote on the EU plans earlier this year, lawmakers supported changes that would more than double the length of time before rotation would have to take place.
Sajjad Karim, a member of the EU parliament in charge of amending Barnier’s proposed measures, has said that national competition authorities are best placed to decide what works best in different countries.
“Over a decade of debate on whether or not mandatory rotation contributes to audit quality and increases competition has, for now, been laid to rest by an independent well respected body — with the CC today removing it from the provisional remedies,” Hywel Ball, a managing partner at Ernst & Young responsible for assurance, said in an e-mail, in reference to the U.K. plans.
The proposals would prohibit “big-four-only” clauses in loan documentation that limit a company’s choice of auditors, the U.K. Competition Commission said. Shareholders will be given the right to vote on whether companies’ audit committee reports contain sufficient information, it said.
The regulator said it wouldn’t put constraints on auditing firms’ ability to provide non-audit services.
The U.K. plans will have a “major impact,” James Chalmers, head of assurance at PwC, said in an e-mailed statement. “It will be critical to get the transition right in order to manage the cost for businesses and potential market disruption,” he said.
The U.K. regulator, which began its investigation in October 2011, will publish the full provisional findings report next week, inviting responses and possible remedies before issuing its final report by October.
The London office of Deloitte didn’t have immediate comment.
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