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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Northern Ireland election results: a shift beneath the status quo

The power of the largest parties has been maintained, while newer parties running on nicher subjects with no connection to Northern Ireland’s traditional religious divide are rapidly rising.

After a long day of counting and tinkering with the region’s complex PR vote transfer sytem, Northern Irish election results are slowly starting to trickle in. Overall, the status quo of the largest parties has been maintained with Sinn Fein and the Democratic Unionist Party returning as the largest nationalist and unionist party respectively. However, beyond the immediate scope of the biggest parties, interesting changes are taking place. The two smaller nationalist and unionist parties appear to be losing support, while newer parties running on nicher subjects with no connection to Northern Ireland’s traditional religious divide are rapidly rising.

The most significant win of the night so far has been Gerry Carroll from People Before Profit who topped polls in the Republican heartland of West Belfast. Traditionally a Sinn Fein safe constituency and a former seat of party leader Gerry Adams, Carroll has won hearts at a local level after years of community work and anti-austerity activism. A second People Before Profit candidate Eamon McCann also holds a strong chance of winning a seat in Foyle. The hard-left party’s passionate defence of public services and anti-austerity politics have held sway with working class families in the Republican constituencies which both feature high unemployment levels and which are increasingly finding Republicanism’s focus on the constitutional question limiting in strained economic times.

The Green party is another smaller party which is slowly edging further into the mainstream. As one of the only pro-choice parties at Stormont which advocates for abortion to be legalised on a level with Great Britain’s 1967 Abortion Act, the party has found itself thrust into the spotlight in recent months following the prosecution of a number of women on abortion related offences.

The mixed-religion, cross-community Alliance party has experienced mixed results. Although it looks set to increase its result overall, one of the best known faces of the party, party leader David Ford, faces the real possibility of losing his seat in South Antrim following a poor performance as Justice Minister. Naomi Long, who sensationally beat First Minister Peter Robinson to take his East Belfast seat at the 2011 Westminster election before losing it again to a pan-unionist candidate, has been elected as Stormont MLA for the same constituency. Following her competent performance as MP and efforts to reach out to both Protestant and Catholic voters, she has been seen by many as a rising star in the party and could now represent a more appealing leader to Ford.

As these smaller parties slowly gain a foothold in Northern Ireland’s long-established and stagnant political landscape, it appears to be the smaller two nationalist and unionist parties which are losing out to them. The moderate nationalist party the SDLP risks losing previously safe seats such as well-known former minister Alex Attwood’s West Belfast seat. The party’s traditional, conservative values such as upholding the abortion ban and failing to embrace the campaign for same-sex marriage has alienated younger voters who instead may be drawn to Alliance, the Greens or People Before Profit. Local commentators have speculate that the party may fail to get enough support to qualify for a minister at the executive table.

The UUP are in a similar position on the unionist side of the spectrum. While popular with older voters, they lack the charismatic force of the DUP and progressive policies of the newer parties. Over the course of the last parliament, the party has aired the possibility of forming an official opposition rather than propping up the mandatory power-sharing coalition set out by the peace process. A few months ago, legislation will finally past to allow such an opposition to form. The UUP would not commit to saying whether they are planning on being the first party to take up that position. However, lacklustre election results may increase the appeal. As the SDLP suffers similar circumstances, they might well also see themselves attracted to the role and form a Stormont’s first official opposition together as a way of regaining relevance and esteem in a system where smaller parties are increasingly jostling for space.