The UK accounting and auditing watchdog regulator has cautioned the competitions authority against adopting plans to mandate the tendering and rotation of the external audit.
The warning, issued by the Financial Reporting Council (FRC), came in response to proposals from the Competition Commission (CC) which suggested mandatory rotation and tendering following an investigation into the statutory audit services market.
The CC's damning provisional findings - that auditors did not serve the shareholders, who were the actual owners of companies - also suggested that solutions could be found in extended reporting requirements and strengthening accountability and independence by giving audit committees and shareholders greater control of external audit. It also proposed increasing the level of transparency between auditors and shareholders, as well as improving quality reviews of the external audit.
In its submission to the CC, the FRC said that it believes strongly that companies need to secure the best auditor for their business and therefore has promoted regular retendering of the audit.
'However, it remains concerned that mandatory rotation could have an adverse effect on audit quality, artificially constraining businesses' choice of audit firm. The FRC also attached importance to retendering being on a "comply or explain" basis. "Comply or explain" allows for flexibility and has allowed the UK's governance regime to develop further and more quickly than would otherwise be the case. The FRC believes "comply or explain" more appropriately recognises the role of the investor in key governance decisions,' it said.
The regulator indicated support for the CC's proposals to strengthen accountability of the external auditor to the audit committee and cited recent changes to the UK Corporate Governance Code which increased the responsibility of the audit committee and reporting to investors on its oversight of the external auditor.
'By introducing extended reporting requirements for auditors and audit committees the FRC has increased the extent of matters that auditors are required to report to audit committees as well as extending the matters that audit committees are required to address in their reports to investors. The FRC believes that the recent changes should have time to take effect and would welcome the opportunity to consult with the Commission on what evidence of their impact should be gathered,' the FRC said.
On audit quality reviews, the FRC said that it believed that a strong inspection regime is an important component of giving confidence to investors and the response to the Commission agrees that the scope for more frequent AQR inspections (in some cases of higher risk) should be considered as well as more detailed reporting of review findings.
FRC CEO Stephen Haddrill said that early signs suggest that provisions put in place by the FRC in the autumn revision of the UK Corporate Governance Code, regarding retendering on a 10 year basis and increased reporting responsibilities of audit committees to investors are already making a difference.
'We are keen to discuss with the Commission the case for further steps once there has been sufficient time for these changes to take full effect,' said Haddrill.
