Competition commission has put the cat among the pigeons

Musical chairs for the audit market?

When the relationships between auditors and some listed companies can be measured in decades, with some spanning more than a century, the idea that companies should be forced to retender for audit services as often as every seven years is a bold suggestion indeed.

But this is what the UK’s Competition Commission (CC) has – albeit provisionally and with much further consultation to come before a final statement in the Autumn – suggested this morning, in what the CC’s audit group chair Laura Carstensen admits represents “some quite radical suggestions”.

The issue Carstensen’s group originally set out to address was the perception that extended relationships between businesses and their auditors breed a kind of familiarity that prevents shareholders’ interests from being protected when auditors run the rule over corporate accounts.

It stands to reason, after all, that an auditor with a longstanding rapport with the management of a business might be inclined to audit financial statements in a way more beneficial to the interests of that management team than to its shareholders.

To shake up this supposedly cosy state of affairs, the CC has proposed mandatory retendering and rotation of audit firms. This, in addition to the prohibition of "Big Four only" clauses in loan documentation, which restrict lending to companies audited by PwC, Ernst & Young, KPMG and Deloitte, and measures to increase engagement between auditors and shareholders.

On paper, mandatory rotation certainly looks like it would protect shareholder interests and increase competition, with smaller firms gaining audit market share from the Big Four, which currently take the lion’s share.

In practice, the concept invokes serious practical considerations that many, especially among the Big Four, think could be counterproductive to the quality of audit services.

First and foremost, mandatory rotation has cost implications to both auditors, who spend time and money on pitches to prospective clients, and those being audited. There are also setting-up costs for auditors and companies in new audit engagements.

Audit rotation after short periods also poses a threat to audit quality, particularly as engagements come to an end. Auditor rotation on a seven year basis is arguably ill-suited to large, complicated financial institutions whose inner workings require a long period for audit teams to understand.

In any case, audit firms already rotate engagement partners with clients to ensure independence, so it is not as if the profession has done nothing to address the issue of over-familiarity.  

But then again, this is exactly what consultation periods are for, and the CC itself acknowledges both the range of possible approaches to the rotation and retendering issue, seeking views on rotation periods of seven, ten and 14 years, and the fact that further recommendations would be contingent on responses to the current proposals.

Carstensen, speaking to me for International Accounting Bulletin this morning, said there is “evidence there is a price benefit to tendering, but we have to weigh up the costs and benefits – we want to know how we can find a point of equilibrium where the benefits are captured, but in such a way that it is not unduly costly or burdensome.”

There is plenty of time to find this point of equilibrium. This morning’s release only represents a summary of provisional findings, and the full text won’t be available until next week, with final recommendations to come in August at the earliest.

Nevertheless, they certainly represent a more aggressive stance to shaking up the market than many in the audit market had expected, and are likely to prompt a broader change in attitudes beyond the UK.

For some time the EU has been rumbling through its own debate on audit reform, and after making some fairly conservative recommendations towards the end of last year, has been widely regarded as waiting on what comes out of the CC before making further statements. Certainly, the CC’s suggestions on mandatory rotation are unambiguously more hard line than anything that has come out of Brussels.

Carstensen told me she expected today’s comments and future findings from the commission to have a definite impact on the continuing EU debate. “Brussels has a lot of respect for our process as very rigorous and very evidence based, and I would expect parties there to be very interested in what we conclude, and the basis on which we reach it.”

In this context, one wonders if the decision to start the rotation discussion at a benchmark of five to seven years was a move designed to bring more impassioned debate to a discussion that some perceived as having become quite flat. Whatever the intention, it has certainly had that effect.  

Links:

http://www.internationalaccountingbulletin.com/news/cc-audit-chairman-comments-on-radical-suggestions/

http://www.internationalaccountingbulletin.com/news/cc-provisional-findings-split-the-profession/

Photograph: Getty Images

By day, Fred Crawley is editor of Credit Today and Insolvency Today. By night, he reviews graphic novels for the New Statesman.

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Let's face it: supporting Spurs is basically a form of charity

Now, for my biggest donation yet . . .

I gazed in awe at the new stadium, the future home of Spurs, wondering where my treasures will go. It is going to be one of the architectural wonders of the modern world (football stadia division), yet at the same time it seems ancient, archaic, a Roman ruin, very much like an amphitheatre I once saw in Croatia. It’s at the stage in a new construction when you can see all the bones and none of the flesh, with huge tiers soaring up into the sky. You can’t tell if it’s going or coming, a past perfect ruin or a perfect future model.

It has been so annoying at White Hart Lane this past year or so, having to walk round walkways and under awnings and dodge fences and hoardings, losing all sense of direction. Millions of pounds were being poured into what appeared to be a hole in the ground. The new stadium will replace part of one end of the present one, which was built in 1898. It has been hard not to be unaware of what’s going on, continually asking ourselves, as we take our seats: did the earth move for you?

Now, at long last, you can see what will be there, when it emerges from the scaffolding in another year. Awesome, of course. And, har, har, it will hold more people than Arsenal’s new home by 1,000 (61,000, as opposed to the puny Emirates, with only 60,000). At each home game, I am thinking about the future, wondering how my treasures will fare: will they be happy there?

No, I don’t mean Harry Kane, Danny Rose and Kyle Walker – local as well as national treasures. Not many Prem teams these days can boast quite as many English persons in their ranks. I mean my treasures, stuff wot I have been collecting these past 50 years.

About ten years ago, I went to a shareholders’ meeting at White Hart Lane when the embryonic plans for the new stadium were being announced. I stood up when questions were called for and asked the chairman, Daniel Levy, about having a museum in the new stadium. I told him that Man United had made £1m the previous year from their museum. Surely Spurs should make room for one in the brave new mega-stadium – to show off our long and proud history, delight the fans and all those interested in football history and make a few bob.

He mumbled something – fluent enough, as he did go to Cambridge – but gave nothing away, like the PM caught at Prime Minister’s Questions with an unexpected question.

But now it is going to happen. The people who are designing the museum are coming from Manchester to look at my treasures. They asked for a list but I said, “No chance.” I must have 2,000 items of Spurs memorabilia. I could be dead by the time I finish listing them. They’ll have to see them, in the flesh, and then they’ll be free to take away whatever they might consider worth having in the new museum.

I’m awfully kind that way, partly because I have always looked on supporting Spurs as a form of charity. You don’t expect any reward. Nor could you expect a great deal of pleasure, these past few decades, and certainly not the other day at Liverpool when they were shite. But you do want to help them, poor things.

I have been downsizing since my wife died, and since we sold our Loweswater house, and I’m now clearing out some of my treasures. I’ve donated a very rare Wordsworth book to Dove Cottage, five letters from Beatrix Potter to the Armitt Library in Ambleside, and handwritten Beatles lyrics to the British Library. If Beckham and I don’t get a knighthood in the next honours list, I will be spitting.

My Spurs stuff includes programmes going back to 1910, plus recent stuff like the Opus book, that monster publication, about the size of a black cab. Limited editions cost £8,000 a copy in 2007. I got mine free, as I did the introduction and loaned them photographs. I will be glad to get rid of it. It’s blocking the light in my room.

Perhaps, depending on what they want, and they might take nothing, I will ask for a small pourboire in return. Two free tickets in the new stadium. For life. Or longer . . . 

Hunter Davies is a journalist, broadcaster and profilic author perhaps best known for writing about the Beatles. He is an ardent Tottenham fan and writes a regular column on football for the New Statesman.

This article first appeared in the 16 February 2017 issue of the New Statesman, The New Times