The Financial Reporting Council (FRC) has written to the Competition Commission (CC) suggesting it may face difficulties in implementing some of the proposed remedies designed to increase competition within the statutory audit market, partly because of potential clashes with current rules, such as the 'comply or explain' approach within its Corporate Governance Code, as well as issues concerning resources for additional regulatory burdens.
In his letter FRC director Stephen Haddrill points out that the CC has recommended the regulator align the corporate governance code with the new requirement for mandatory 10-year tendering , but says that amending the code to include a mandatory provision would run counter to its 'comply or explain' philosophy.
The FRC says it plans to remove the reference to tendering from the code and include the topic as one of the issues to be covered during its consultation on potential changes to the code scheduled to take place in the first half of this year.
With regard to calls from the CC for it to extend its Audit Quality Review (AQR) inspections and reporting, the FRC says it will begin publishing reports on BDO and Grant Thornton in the first half of 2015. However, it says that other firms which fall within full scope, (Mazars, Crowe Clark Whitehill and Baker Tilly) do not currently audit sufficient public interest entities to make annual reporting practicable as they carry out only two or three audits each per year, and will continue to be reviewed at three yearly intervals unless circumstances change.
However, the FRC points out that increasing the number of FTSE 350 audit inspections from April 2014 in order to meet the CC's target by the 2016-17 reporting cycle will be 'subject to sufficient funding and resource being available' from the Recognised Supervision Bodies, given that the FRC will also be required to meet the requirements of the new EU audit directive and take on local government audit. The regulator says only 322 companies in the FTSE 350 fall within the FRC's remit since the others are primarily from elsewhere in the EEA and subject to inspection by other regulators.
The FRC describes the requirement for the audit committees of FTSE 350 to disclose the findings of any AQR carried out during the current reporting period as 'complex' and raising issues around confidentiality, consistency and risk. It says it is currently looking at how best this can be achieved and whether changes to the grading system are required, so this remedy will also be included in its consultation on change to the code.
The FRC challenges the CC over amending the corporate code to require FTSE 350 companies to seek shareholder views on audit issues and the audit committee's report as unlikely to add extra value, but says these changes will also be included in its planned review.
The FRC has also airs concerns about changes to its articles of association to include an objective to increase competition in the audit market, saying it has only 'limited competence' in this area. In its planned consultation, the regulator says it will ask for views on whether it should have a competition objective covering all of its work, not just audit inspection, in terms of promoting health, well informed competition for capital.
The FRC response is here: HERE
