The Competition Commission (CC) has published details of the main changes to be introduced in the supply of statutory audit services to large companies, which include mandatory audit tendering every ten years and five yearly reviews of every audit engagement by the Financial Reporting Council (FRC).
The CC has rejected FRC guidance that FTSE 350 companies should go to tender on a 'comply or explain basis', which formed part of the regulator's response when the audit market remedies were proposed earlier this year. Instead, the CC says FTSE 350 companies must put their statutory audit contracts out to tender at least every ten years, an extension of its original proposal to mandate a five-yearly rotation.
However, the report states that: 'No company will be able to delay beyond ten years, and the CC believes that many companies would benefit from going out to tender more frequently at every five years. If companies choose not to go out to tender this frequently, the audit committee will be required to report in which financial year it plans to tender'.
The FRC's Audit Quality Review (AQR) team has been given new responsibilities to review every audit engagement in the FTSE 350 on average every five years, with the audit committee reporting the findings to shareholders during the relevant reporting period. The CC says the FRC should amend its articles of association to include an objective in regard to competition.
The CC has also introduced a prohibition on 'Big Four-only' clauses in loan agreements, although it will be possible to specify that any auditor should satisfy objective criteria.
There are a number of requirements designed to strengthen the accountability of the external auditor to the audit committee and reduce the influence of management. These include a stipulation that only the audit committee is permitted to negotiate audit fees and influence the scope of audit work, initiate tender processes, make recommendations for appointment of auditors and authorise the external audit firm to carry out non-audit services. There must be a shareholders' vote at the AGM on whether audit committee reports in company annual reports are satisfactory.
The CC has ruled out several possible remedies which were considered earlier, including mandatory switching; limitations on the provision of non-audit services by a company's auditor; joint or major component audit; shareholder group or FRC responsibility for auditor reappointment; and independently resourced risk and audit committees.
Laura Carstensen, chairman of the CC's audit market investigation group said: 'Our measures will deliver lasting change in a market where currently a major company putting its audit out to tender remains unusual enough to be a news story.
'Instead of long unchallenged tenures which can reduce the appearance of objectivity and scepticism essential to an effective audit, there will now be far greater transparency and scrutiny. It will also open the door to other auditors who now have the chance to compete regularly for business and show they're up to the mark.'
The CC says there will be some additional costs as a result of the measures, including £1m to £2m a year for the FRC with respect to the AQR team. It estimates the costs of compliance for companies and firms as unlikely to exceed £3m a year, and says the requirement for audit committees to take on responsibility for more aspects of the audit relationship will reduce the burden on FDs. The CC says that, overall, it does not believe the total cost of its remedies package will exceed £10m a year.
The new measures are set out in the summary to the CC's final report, which is released today, with the full report to be published shortly. The new regulations are expected to come into force from the last quarter of 2014.
Sign up for AL newsletter HERE
