Audit services: Four reasons why it pays to be a first mover
Nov 27, 2014 9:49:00 AM
During the original dot-com boom, the idea of first mover advantage gained massive currency. Staking out a digital domain before anyone else showed up was considered the best way to guarantee success – gaining mindshare, customers, and above all, experience and personnel that would be denied your rivals.
In the decade and a half since then, and perhaps in part because of the dot-com crash, the cult of the first mover advantage has waned somewhat – to the point when “fast following” has become the conventional wisdom.
That might be smart in tech manufacturing (Apple, for example, rarely breaks new ground despite its reputation for innovation) and even fast-moving consumer goods (where companies such as Procter & Gamble are happy to publicly eschew category innovation). But is it always a good idea to “wait and see”?
The answer to that question is being tested in the audit market right now.
New rules in the EU and the US are pushing companies to tender for their statutory audit more frequently. In the EU, the European Commission has mandated tendering every 10 years, and in the UK, the Competition and Markets Authority (formerly the Competition Commission) will be enforcing this rule starting in October. (Note that it’s still consulting on the final application of the EU rules for UK businesses).
The question, then, is whether companies – particularly those with very long-standing auditor relationships – ought to jump right in and run an audit tender soon; or wait until they’re required to do so by the new regulations (most companies have till June 2020 to complete a tender and change their auditors).
A lot hinges on how that relationship is working right now. Audit is an odd service. In theory, it’s commissioned by the independent directors via the audit committee. In practice, the CFO is the point-person for the relationship, and a breakdown in relations between the finance function and auditor – while prompting questions from the non-execs on the audit committee – is probably going to hasten the tender process.
But a poor relationship would trigger a tender even without the new rules. Why would a company ticking along quite nicely with their audit firm jump the gun on the change in policy? Well, there are four good reasons.
First, holding out risks losing the pick of the teams at the audit firm of your choice. Any CFO will tell you how valuable it is to have auditors who understand the nuances of the sector and don’t ask stupid questions all the time. That’s not about cosiness – it’s like visiting a dentist to get your teeth checked, rather than complaining to your GP about vague mouth pain. Good partners – and, equally important, good teams – aren’t plentiful, and waiting to run your tender risks getting the right team in a presentation from just one or two bidders. Worse, you might end up dealing with the second string from all your options.
Second, shareholder pressure. As more big players start to undertake tenders – and in most cases replace audit firms after multigenerational relationships – it starts to look like there might be something to this auditor rotation thing. Quite apart from anything else, technology and globalisation have fundamentally changed the nature of business and of audit – so refreshing the relationship could result in a better and more efficient service. Shareholders will at least want to know why you haven’t bothered.
Third, it gets the process out of the way. Tender now, the theory goes, and you can forget about when everyone else is starting to get twitchy in five years (or less). Better still, it’s a PR and IR win – it shows you’re thinking ahead on governance issues and put a value on independent oversight.
Fourth, you can exploit audit firm eagerness to impress. Even the Big Four want to make sure they don’t miss out on this reshuffling of the pack, and mid-tier firms are developing a real sense that they might pick up bigger and more valuable audit clients. So in the wake of the demand for tendering, they’ve upped their game – and will look on the tender process as a great shop window, even if they don’t win.
So in this case, early adoption does have merits. Fast followers will learn little or nothing from the experience of the first movers – and might lose out on the personnel and attention that companies moving quickly can capture. Above all, it puts you on the front foot with the regulators – and that’s always a good place to be.
These four recommendations for purchasing audit services are taken from our latest UK Audit Services whitepaper - which can be downloaded by clicking here.
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