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.  


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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Be a glitch in our benefits system, and the punishment is to starve

Faceless bureaucrats are tipping claimants into hunger. 

So it’s official. If anyone still doubted that benefit sanctions are linked to food bank usage, a study by the University of Oxford and the Trussell Trust has found “a strong, dynamic relationship exists” between the number of sanctions in local authorities, and the number of adults receiving emergency food parcels.

The research examined the impact of tougher sanctions imposed by the Coalition government in 2012. For every extra 10 sanctions per 100,000 claimants, there were five more adults needing food. By contrast, when sanctions declined by 10, there were roughly 2 fewer instances of adults needing food. 

The study questioned whether a system that creates food poverty is “a fair penalty” for those who intentionally or inadvertently break the rules surrounding benefits payments.

Indeed, benefits sanctions can often, on appeal, seem brutal. Take the man who missed his Jobcentre appointment because he was in hospital after being hit by a car, or the woman who received her letter a day after the proposed meeting was scheduled. 

But what the study doesn’t chart is the number of people plunged into food poverty simply because of a bureaucratic mistake. A 2014 report by MPs, Feeding Britain, noted benefit-related “problems” was the single biggest reason given for food bank referrals. 

It found that many of these problems were avoidable: 

“We heard that one such problem arose as a result of Jobcentre Plus staff having to rely on two different computer systems, each on different screens, in order to calculate and process a claim, if more than one benefit was involved. This was likely to delay the processing of a benefit claim.”

In other words, the system we pay for with our taxes is failing us when we need it.

Claimants often find themselves at the bottom of an unaccountable power structure. Gill McCormack, who is the manager at the Glasgow North West food bank, has a son with Down’s Syndrome and brain damage, and lost her husband at just 21.

As an unusually young widow, she repeatedly has had to show benefits officials her husband’s death certificate, and fight for her son’s Disability Living Allowance. At one point, her benefits were stopped, and she lived on bags of frozen peas.

She told a fringe event at the SNP conference: “The amount of times I have been back and forth with this system – the only way I can describe it is as a ping pong table.”

If administration errors can leave people this hungry – and when I was a journalist at The Mirror I heard from readers about dozens of similar cases – we are heading for a world where large gaps in support are institutionalised.

Universal Credit, the new benefits system being rolled out across the country, only kicks in after six weeks. Claimants can apply for an advance. But if this is not properly communicated, six weeks is long enough to starve. 

As the study acknowledges, modern food poverty does not just exist in food banks, which are a very specific type of lifeline. The Facebook group Feed Yourself For £1 a Day has nearly 70,000 members. Some are simply frugal mums or house proud retirees. But many of those who post are desperate.

One reason is illness. A single mum, recently wrote that the group was a “lifeline” when she was coping with breast cancer: “I have never been so poor.” Another wrote back that after being diagnosed with breast cancer, she lost her home and her job, and was forced to spend 10 days living in her car.

Others are simply women going back to work, who lose their benefits and have to wait for wages. A mother in five wrote in asking for cheap meal ideas as “I’ve got £50 a week to live off as starting work”. 

So what is the answer to this kind of hidden hunger? The government is still consulting on a “Help to Save” scheme, that will provide more incentives for low-paid workers to create a rainy day fund. Groups such as Feed Yourself for £1 a Day should be encouraged, because they are valued by their members and teach families how to eat healthily for less. But shifting responsibility to those on the breadline only works so far. After all, you cannot easily save if you are an unpaid carer. You cannot cook from scratch if your gas meter has run out. And you can't keep to a budget if food prices, as predicted, start to rise.

The latest research into food banks should reignite the debate about sanctions. But it should also raise wider questions about those who administrate and enforce our taxpayer-funded welfare state, and how, in the 21st century, faceless officials can tip unfortunate people into something close to famine. 

Not recently, many commentators found it hard to believe the plotline of Ken Loach’s latest film, in which a man is denied disability benefits because of a computer glitch. Perhaps they're not to blame - after all, since Jobcentres are removing the free phones that would allow claimants to kick up a fuss, many are effectively silenced. But so long as the food banks stay open, there is more listening to be done. 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.