Every five years companies in the FTSE350 will have to rotate their auditing partner, and it is interesting for me to see how that will help drive the timing of when the remaining companies that haven’t tendered, choose to tender and who they choose to include in the tender process.
This was a topic that I spoke about in our recent webinar (The Creative Accountant: The evolution of the audit market), alongside BDO. The one-hour panel session saw myself, category director, Richard James and BDO’s partner, James Robert, put our heads together to discuss the evolution of statutory audit in light of the regulatory changes and the flux it is bringing to the market.
Prior to 2011, the average tenure of a FTSE100 audit firm was 49 years, with the majority of firms never having changed auditors in living memory, some being retained for over a century. On the surface it might seem like there is a lack of competition, lack of innovative approach, disconnect between cost and value and it also appears that the FTSE companies are only switching amongst the Big Four (PWC, KPMG, Deloitte and EY). This has caused increased scrutiny and has led to more people looking into the way in which organisations are audited.
However, as Robert’s comments, “We are seeing a lot more liquidity in the market and a very sharp pick up in the number of companies going out to tender and indeed, in those changing their auditor.
“That is not leading to a mass exodus of the giant firms but it is leading to a greater market awareness amongst purchasers of audit services and bringing with it more transparency of what is involved in the audit process.
“Nearly every audit commitment going to tender is doing so for the first time, on the bottom rung of a learning curve that’s leading people to talk to people they would not have spoken to before.”
Firms like BDO LLP are increasingly winning business amongst FTSE constituents. There has been a sharp pickup in the number of companies going out to tender and then as a result changing auditors. In 2014 alone, following regulatory changes from the Competition & Markets Authority, over 46 companies tendered their audit – almost twice the number of audits tendered in 2013 and eleven times the number of 2012 audits.
“The way in which tenders are being conducted is new to most firms. Organisations are ‘feeling’ their way through in how to manage the process. This gives Proxima a very interesting dynamic in the market place,” explains James.
He adds, “There is a difference in culture and approach, it is more dynamic than a few years ago, as many are more willing to outside of the Big 4.”
As firms are now obliged to announce when they are going out to tender and have to meet the timescales set up by the EU’s Competition & Market Authority, these changes look set to continue into 2015 and beyond, with many more organisations going out to tender and consequently change auditors.
I call it the ‘teenage market’ - as you are starting to see the larger organisations having to learn the tender process again and how best to go to tender. In the next round of tenders these giant companies will have a better relationship and mutual understanding with the tier 2 audit firms – so there is less of a leap to make the choice in using a non-big 4 provider. I’m optimistic about this snowball effect and how far the second tiers will go in penetrating the market.
Click here for more information on the impact of the regulatory change on the audit market and how the function of an audit will change in line with market changes.
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