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Mandatory audit rotation – a sourcing challenge

Richard James
Jul 23, 2013 10:57:00 AM

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So, after months of deliberation and consultation, the Competition Commission published its provisional decision on the remedies relating to the market for statutory audit services. But will this really achieve the CC’s laudable objectives to improve quality and broaden the competitive market for statutory audit?

On the face of it, it’s quite dramatic in its implications: mandatory audit tenders every 5 years for FTSE350 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 improve quality and broaden the competitive market for statutory audit?

Proxima has welcomed and actively participated in the Commission’s review over recent months. We have long felt that the market for statutory audit services is distorted and biased towards the Big 4 for large to medium sized firms, particularly those within the FTSE350.

However, for us, the provisional findings on remedies raise as many questions as answers at this stage:

  1. The Commission recommends that audits be put out to tender every 5 years (7 in “exceptional circumstances”):

      • How will a “tender” be defined and how will the FRC monitor tenders to ensure they are not charade processes?
      • How will the tender process open up the FTSE350 to the larger mid-tier firms and give them greater chances of success in breaking the Big 4’s oligopoly?
        In itself, an obligation to tender won’t move Audit Committees away from their current prejudice against Mid-Tier firms. The Commission has specifically rejected the concept of joint audits (which are used successfully in several other EU states). This might have been a way of allowing these firms to take on partial responsibilities and acting as a “test bed” for their capabilities.
      • If all of the FTSE350 has to run a tender every 5 years there will be, on average, 70 or more tenders put to the market each year. With such large volumes of activity, the Big 4 will necessarily pick and choose those tenders on which they will apply greater focus and expertise, potentially reducing competition for “less attractive” clients, as well as for those outside of the FTSE350 who might want to bid their audits

  2. The proposed remedies take no account of the Big 4’s vested interests in providing more lucrative advisory services to their clients. If they think they’ll lose this in taking on audit work will they have the appetite to compete actively in the market?

  3. The Audit Quality Review team will be required to report on audits every 5 years but “should review and report on the larger Mid-Tier firms on an annual basis.” This implies a lack of confidence in these firms that could also discourage clients from moving their business away from the Big 4 – do you really want your audit itself to be audited every year?

We’ll continue to debate the practicalities of implementation of these proposals and hope that the Commission’s final recommendations deal with these important issues. Overall our verdict at this stage is that the Commission is moving in the right direction but has a way to go before reaching its destination. We hope they don’t get off the train too early!

In the meantime, we’re actively supporting several clients who are already undertaking competitive reviews in the market, pre-empting the CC’s recommendations.

We are convinced that the market is already seeing improvements in the quality and relative costs of audit services as a result of this review and will continue to support recommendations that drive this forward.

If you would like to read more thought pieces around our audit commentary as well as our submission to the Competition Commission click here

Please share your thoughts or comments below

Proxima Group



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