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.

Anoosh Chakelian
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“We need an anti-Conservative force”: Nick Clegg wants to work with Labour after the election

On the campaign trail in Sheffield Hallam, the former Deputy Prime Minister talks about how to challenge Brexit and the “Boudicca” Theresa May.

It’s pouring with rain and Nick Clegg has forgotten his coat. “It was so nice this morning,” he groans, looking doubtfully down at his outfit – a navy v-neck, pale shirt, rumpled blue blazer and dark trousers with some dried dirt splattered on the ankles. Yesterday evening, he and his team of activists had decamped to a pub after the rain became too heavy for doorknocking.

We are taking shelter in the Lib Dem campaign office in Sheffield (this interview took place before the Manchester attack). Teetering towers of envelopes and flyers, rubber bands and canvass papers enclose a handful of volunteers sipping tea and eating mini flapjacks. Giant diamond-shaped orange placards – “Liberal Democrats Winning Here” – are stacked against every spare bit of wall.

Clegg has represented Sheffield Hallam, a largely affluent and residential constituency on the west edge of the south Yorkshire city, for 12 years. It has stayed with him throughout his “Cleggmania” popularity as Lib Dem leader in opposition and his difficult days as Deputy Prime Minister in coalition with the Tories. Now he hopes to win it over as a vocal anti-Brexit champion.

After a relentless campaign by the local Labour party in a bid to “decapitate” the Lib Dems in 2015, Clegg’s majority fell from 15,284 to 2,353. He is hoping Labour is unable to further chip away at his support this time round.

“I’m confident but I’m not complacent,” he tells me, nursing a cup of tea as we wait to go canvassing. He believes voters who punished him last time – for going into government with the Conservatives, and breaking his tuition fees pledge – are changing heart.

“I was a target with a great big cross on me,” he says, tracing across himself with his finger. “I personally always think it was this odd cartoon caricature both made of me but also of how people view me... People stop listening to what you have to say – I distinctly was aware at one point when I literally could’ve said ‘Baa Baa Black Sheep’ and it would’ve made no difference. Whereas now, people are very keen to listen again.

“Those who were critical in the past now take a more nuanced view, perhaps, than they did of what I’ve tried to do in politics, and feel I have a role to play in the big debate on Brexit.”

“I was a target with a great big cross on me”

Even when he’s not raging against Brexit, Clegg exudes Proud European. He uses a Norwegian weather app – “they’ve invented something better than the BBC one!” – on his phone (which appears to have failed him today), and keeps stifling yawns because he was up until 2am reading a Hungarian novel called Portraits of a Marriage. “I really recommend it. It’s by Sándor Márai,” he tells me, eagerly spelling out his name. “Of course, I’m reading it in translation.”

Although Sheffield Hallam voted Remain as a constituency (calculated at about 65 per cent), Clegg is still having trouble with his anti-Brexit message among voters. “It’s a very British attitude,” he smiles. “Lots of people who voted Remain sort of say, ‘oh, come on’. The phrase I keep hearing is: ‘We’d better make the best of it.’”

We encounter this attitude when out doorknocking in Lodge Moor, Fullwood, on the rural edge of the constituency. The streets we visit are inhabited by elderly couples and families in detached bungalows with low, steep rooves and immaculate driveways, and rows of whitewashed semi-detached houses.

One father opens the door, as his young son drags an overzealous yellow labrador away from the threshold. He is an occupational therapist and his wife is a teacher. They also have a child with special needs. Although “Brexit’s a bit of a stress”, he says his family’s priorities are education and the NHS. “I haven’t made my mind up who to vote for,” he tells Clegg. “I do know that I won’t be voting Conservative, but I want to vote for an independent.”

“I’m very keen on staying in Europe but I can’t see a way around it,” says a retired man with fine white hair in a scarlet jumper who lives on the road opposite. Clegg counters: “It may all be too late, it may all be hopeless, but I wouldn’t underestimate how public opinion may shift.” The man will vote Lib Dem, but sees battling Brexit as futile.

“Labour’s days as a party of national government have ended”

“The frustrating thing for us, as Lib Dems” – Clegg tells me – “is I would lay a fairly big wager that it will be precisely those people who will then say in a year or two’s time that this Brexit’s an absolute nonsense,” though he does admit it’s “politically tough” for his party to make Brexit central to its campaign.

“It would be much better if you were leader,” the retired man’s wife chips in, pulling on a blue cardigan as she joins them at the doorway. “Tim [Farron] – he’s a nice man, but he’s not quite the same.”

Clegg as an individual gets a lot of love at almost every doorstep. “You should come to Knit and Natter,” beams one woman involved in the local church. “You don’t have to knit – as long as you can natter!”

When I ask whether he feels nostalgic for Cleggmania, Clegg says he does not “hanker after past glories”. He does, however, miss being in government – and compares Theresa May’s current persona with the woman he knew and worked with in cabinet.

“She has been converted from what I found to be a rather conventional, not wildly exceptional politician by the sort of hysterical sycophancy of the Daily Mail and others into this colossal political figure, this sort of Boudicca,” he splutters. “I’m sure she would say this about herself – she has very little peripheral vision. She’s not an innovative politician. She’s not a big picture politician.”

Although Lib Dem leader Tim Farron has ruled out coalition deals with May’s Conservatives and Jeremy Corbyn’s Labour, Clegg urges his party to work with Labour following the election. “The Labour party is still operating under this illusion that it can win an election – it can’t!” he cries. “It’s irrelevant who’s leader. It doesn’t matter whether it’s Jeremy Corbyn or David Miliband – there is no way that the Labour party can beat the Conservatives under this electoral system . . . It’s impossible.”

“I am self-evidently a pluralist – why else would I go into coalition?”

He believes that because the “pendulum of politics” is stuck on the right that “we can’t continue with business-as-usual after 8 June”.

“If we all just carry on talking to ourselves in our own rabbit hutches, all that will happen is we will carry on with this dreary, soulless, almost perpetual one-party domination by the Conservatives,” he warns. “The dam needs to break within the Labour party, and the moment they understand that they can never win again – that their days as a party of national government have ended – can you start thinking about how to mount a proper challenge to Conservative hegemony.”

Clegg clearly wants an active role in future cooperation. “I am self-evidently a pluralist – why else would I go into coalition?” he asks. “I’ll always be happy to play my part in doing what I think is right, which is that we need a proper anti-Conservative force or forces in British politics.”

Labour’s campaign in Sheffield Hallam is not spooking local Lib Dems as much as in 2015, when it was polling ahead of them in the build-up to the election. Concerns about Corbyn’s leadership and Labour’s vote in favour of Article 50 appear to have dented its once surging support here.

“I’m voting Lib Dem,” declares a middle-aged man in big aviator-framed glasses and a silver chain, opening the door and looking distinctly unimpressed. “But not because it’s you.”

“Ah,” grins Clegg.

“I’m voting Lib Dem because I don’t want Labour in. I don’t want anybody in at the moment; I don’t like anybody’s politics,” he rumbles. “But it made me cringe when I heard Corbyn speak. Because he’s got the giant-sized ripe-flavoured carrots out, and people don’t realise they’ve got to pay for them.”

Clegg will be relying on such voters to keep his seat. But even if he doesn’t win, don’t expect him to disappear from political life until the Brexit negotiations have well and truly concluded. “It would be a dereliction of duty to the country to fall in line with the conspiracy of silence on the terms of Brexit both Labour and the Conservatives are trying to smother this election campaign with,” he says. “It’s the question of the day.”

Anoosh Chakelian is senior writer at the New Statesman.

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