The Financial Reporting Council (FRC) has rejected a proposal from the Competition Commission (CC) which sought to give the regulator a 'secondary duty' to promote competition between audit firms, saying this would be ineffective and costly.
The CC set out its revised remedy following publication of its provisional findings on competition within the audit market for FTSE 350 companies. It wanted the FRC to make more information available via its annual Audit Quality Inspection reports so that these could be used to compare audit firm's performance.
In a letter in response to the consultation on the CC's plans, FRC chief executive Stephen Haddrill questioned the usefulness of the FRC having such a secondary duty, pointing out that 'we cannot, for example, be put in a position in which we feel pressure to hold back from regulatory action against a firm or company because such an action could damage the reputation of an audit firm and hence its ability to compete in the market.'
Haddrill said the proposed extension of the FRC's work would not enhance competition and would prove expensive. In order to achieve a representative selection of audits, he calculated that the regulator would need to undertake nearly 200 inspections for the Big Four alone, six times the present number. Inspections of smaller company audits would need to rise to around 250, two and half times the current level. This would see the total inspections cost rise from £3.5m to £9m.
The letter also points out it would be hard to create comparative samples for non-Big Four firms in the FTSE 350 as they only audit 13 companies in this category, many of which are atypical businesses such as investment trusts.
Haddrill said that any attempt to put a 'league table' of auditors into the market risked creating 'a battle with the firms on the grades of individual audits, hence enhancing their defensiveness and distracting from their focus on promoting audit quality.'
He concluded the letter by saying that there were 'serious doubts' about the likelihood of the CC proposed remedy being successful, but that the FRC was prepared to review alternative ways to enhance its reporting.
