Some of the UK's biggest companies and major investment groups have given a thumbs down to Competition Commission (CC) proposals to introduce mandatory five-yearly audit re-tendering, saying this is likely to prove costly and disruptive to business without increasing competition.
In its letter of response to the CC's provisional decision on remedies for the statutory audit market, which was published July 2013, Royal Dutch Shell CFO Simon Henry warns of the 'possible unintended consequences of certain aspects of the proposal'.
Henry says that Shell's experiences of going out to tender for its external audit in 2004-2005 showed that a 'robust review' of bids called for 'significant senior management attention and time', both on the part of the company tendering and the invited audit firms.
He argues that requiring companies to go through the tendering process every five years will have a negative impact on the quality of both the review and the audit itself. Shell's response also states that audit firms may become more selective about the tenders they participate in, because of the time and costs involved, which would result in less competition rather than more.
In its response, Barclays agreed with Shell that changes to the corporate governance code announced by the Financial Reporting Council (FRC) in 2012, requiring FTSE 350 companies to retender their external audit every 10 years, should be given time to take effect before any further changes are considered.
Barclay says this kind of regime is likely to increase transparency and help shareholders make an informed decision on whether to tender, but says that the final cost/benefit decision on whether to tender is one for the audit committee and shareholders and should not be mandatory.
GlaxoSmithKline (GSK) and BT also backed the idea of giving the FRC's plans time to bed down, with GSK warning that mandatory five-year tendering is likely to lead to significant cost increases, business disruption, and interfere with the judgment of audit committees.
The UK's major investment groups agreed with company managers - Standard Life described the CC's five-year requirement as 'excessive' and warned that increasing the level of tenders could advantage the bigger audit firms which would have the capacity and resources needed to deal with more tendering. The company said the CC's estimate of around £30m in additional costs incurred did not take account of the management time required during the process.
Standard Life also the CC's proposals seemed designed to produce lower cost audits, rather than improved audit quality.
The Investment Management Association (IMA) said it had doubts whether a five-yearly audit tender would extend opportunities for smaller audit firms, and says most switches would be likely to take place between the Big Four. While some investment firms support a five or seven year re-tendering requirement, IMA says the majority see this as too frequent and give their backing to the FRC measures.
It also challenged whether more frequent audit quality reviews, it challenges whether this would result in increased choice. It is critical of plans to have a vote on the audit committee report, saying that investors already have sufficient oversight of audit matters and it is not clear what a vote against would mean in practice. However, it welcomes plans to strengthen the accountability of the auditor to the audit committee and providing greater transparency over how the audit committee has discharged its responsibilities.
