The Competition Commission and Auditors – shaking up the market or just stirring?

(We're delighted to feature a guest post from Richard James and Guy Strafford of Proxima, who manage reviews and tenders of audit services for several of their procurement outsourced services clients).

So, after months of deliberation and consultation, the Competition Commission (CC) published its provisional decision on the remedies in the market for statutory audit services .

On the face of it, it’s quite dramatic in its implications: mandatory audit tenders every 5 years for FTSE 350 firms (the EC only recommended every 14 years), no more “Big 4 only” clauses in loan documents, a strong role for the Audit Quality Review (AQR) to drive improved quality…

 But will this really achieve the CC’s laudable objectives to shake up the market, improving quality and broadening the market for statutory audit? Or is it merely going to stir the same mix?

 We have long felt that the market for statutory audit services could operate better if there were more players, particularly within the FTSE350, where the Big 4 handle more than 95% of audits. But the Commission has a challenging role in balancing all of the interests in this area – you only have to read the meeting notes on the Commission’s website to see how each party has interpreted the current situation.

 However, the provisional findings on remedies raise a number of questions at this stage which the CC may want to consider further:

 1.  Audits will have to be put out to tender every 5 years (7 in “exceptional circumstances”), but:

  • How will a “tender” be defined and how will the FRC gain confidence in the process taken?
  • How will the larger Mid-Tier firms actually break into the Big 4’s patch? In itself, an obligation to tender won’t move Audit Committees from their current prejudice against Mid-Tier firms. The Commission specifically rejected the concept of joint audits which might allow these firms to take on partial responsibilities and act as a “test bed” for their capabilities
  • If all of the FTSE350 has to run a tender every 5 years there will be 70 or more tenders put to the market each year. With such an increase in activity, the Big 4 may pick and choose those tenders where to apply their focus and expertise, potentially reducing competition for “less attractive” clients. For the “attractive” clients, though, their better-resourced teams will do all in their power to protect their interests against the smaller usurpers.

 2. The proposed remedies take little account of the Big 4’s provision of lucrative advisory services and the impact this may have on decisions to tender. If they think they’ll lose out consulting work by taking on audit work, will they compete actively or might we see them vying for the “honourable second” slot?

 3.  The changes also imply greater responsibility and more work for Audit Committee Chairs. How might this affect the attractiveness and remuneration for this role?

 Clearly, there aren’t simple solutions to these issues but we believe that in a rarefied market with limited participants, the dynamics of how this particular sector operates need to be closely scrutinised and then carefully tweaked if we are all to get the best from what is an important area.   Quite a challenge!

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