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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A father’s murderous rage, the first victims of mass killers and Trump’s phantom campaign

From the family courts to the US election campaigns.

On 21 June, Ben Butler was found guilty of murdering his six-year-old daughter, Ellie. She had head injuries that looked like she’d been in a car crash, according to the pathologist, possibly the result of being thrown against a wall. Her mother, Jennie Gray, 36, was found guilty of perverting the course of justice, placing a fake 999 call after the girl was already dead.

When the trial first started, I clicked on a link and saw a picture of Ben and Ellie. My heart started pounding. I recognised them: as a baby, Ellie had been taken away from Butler and Gray (who were separated) after social services suggested he had been shaking her. He had been convicted of abuse but the conviction was overturned on appeal. So then he wanted his daughter back.

That’s when I spoke to him. He had approached the Daily Mail, where I then worked, to tell his story: a father unjustly separated from his beloved child by uncaring bureaucracy. I sent a writer to interview him and he gave her the full works, painting himself as a father victimised by a court system that despises men and casually breaks up families on the say-so of faceless council apparatchiks.

The Mail didn’t run the story; I suspect that Butler and Gray, being separated, didn’t seem sufficiently sympathetic. I had to tell him. He raged down the phone at me with a vigour I can remember half a decade later. Yet here’s the rub. I went away thinking: “Well, I’d be pretty angry if I was falsely ­accused and my child was taken away from me.” How can you distinguish the legitimate anger of a man who suffered a miscarriage of justice from the hair-trigger rage of a violent, controlling abuser?

In 2012, a family court judge believed in the first version of Ben Butler. Eleven months after her father regained custody of her, Ellie Butler was dead.

 

Red flags

Social workers and judges will never get it right 100 per cent of the time, but there does seem to be one “red flag” that was downplayed in Ben Butler’s history. In 2005, he pleaded guilty to assaulting his ex-girlfriend Hannah Hillman after throttling her outside a nightclub. He also accepted a caution for beating her up outside a pub in Croydon. (He had other convictions for violence.) The family judge knew this.

Butler also battered Jennie Gray. As an accessory to his crime, she will attract little sympathy – her parents disowned her after Ellie’s death – and it is hard to see how any mother could choose a violent brute over her own child. However, even if we cannot excuse her behaviour, we need to understand why she didn’t leave: what “coercive control” means in practice. We also need to fight the perception that domestic violence is somehow different from “real” violence. It’s not; it’s just easier to get away with.

 

Shooter stats

On the same theme, it was no surprise to learn that the Orlando gunman who killed 49 people at a gay club had beaten up his ex-wife. Everytown for Gun Safety, a gun control group, looked at FBI data on mass killings and found that 16 per cent of attackers had previously been charged with domestic violence, and 57 per cent of the killings included a family member. The Sandy Hook gunman’s first victim was his mother.

 

Paper candidate

Does Donald Trump’s presidential campaign exist if he is not on television saying something appalling about minorities? On 20 June, his campaign manager Corey Lew­andowski quit (or was pushed out). The news was broken to the media by Trump’s 27-year-old chief press officer, Hope Hicks. She was talent-spotted by The Donald after working for his daughter Ivanka, and had never even volunteered on a campaign before, never mind orchestrated national media coverage for a presidential candidate.

At least there aren’t that many staffers for her to keep in line. The online magazine Slate’s Jamelle Bouie reported that Trump currently has 30 staffers nationwide. Three-zero. By contrast, Bouie writes, “Team Clinton has hired 50 people in Ohio alone.” Trump has also spent a big fat zero on advertising in swing states – though he would argue his appearances on 24-hour news channels and Twitter are all the advertising he needs. And he has only $1.3m in his campaign war chest (Clinton has $42.5m).

It feels as though Trump’s big orange visage is the facial equivalent of a Potemkin village: there’s nothing behind the façade.

 

Divided Johnsons

Oh, to be a fly on the wall at the Johnson family Christmas celebrations. As Boris made much of his late conversion to Leave, the rest of the clan – his sister Rachel, father Stanley and brothers, Leo and Jo – all declared for Remain. Truly, another great British institution torn apart by the referendum.

 

Grrr-eat revelations

The highlight of my week has been a friend’s Facebook thread where she asked everyone to share a surprising true fact about themselves. They were universally amazing, from suffering a cardiac arrest during a job interview to being bitten by a tiger. I highly recommend repeating the experience with your own friends. Who knows what you’ll find out? (PS: If it’s juicy, let me know.)

Peter Wilby is away

Helen Lewis is deputy editor of the New Statesman. She has presented BBC Radio 4’s Week in Westminster and is a regular panellist on BBC1’s Sunday Politics.

This article first appeared in the 23 June 2016 issue of the New Statesman, Divided Britain