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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Article 50 deadline: Nick Clegg urges Remainers to "defy Brexit bullies and speak up"

The former deputy Prime Minister argued Brexiteers were trying to silence the 48 per cent. 

On Wednesday 29 March, at 12.30pm, Britain's ambassador to the EU, Tim Barrow, will hand deliver a letter to the European Council President, Donald Tusk. On that sheet of paper will be the words triggering Article 50. Nine months after Britain voted for Brexit, it will formally begin the process of leaving the EU.

For grieving Remainers, the delivery of the letter abruptly marks the end of the denial stage. But what happens next?

Speaking at an Open Britain event, former Deputy Prime Minister and Lib Dem Leader Nick Clegg had an answer. Responding to the concerns of a scientist in the audience, he declared:

“The most important thing of all is people like you make your voice heard. What the hysterical aggression from the Brexiteers means is they want to silence you.

"That’s why they attack everyone. The Bank of England - how dare you speak about the British economy? How dare judges make a judgement? How dare Remainers still believe they want to be part of the EU? 

"What they systematically try to do is bully and delegitimise anyone who disagrees with their narrow world view.

"It’s a ludicrous thing when 16.1m people - that’s more than have ever voted for a party in a general election - voted for a different future, when 70 per cent of youngsters have voted for a different future.

"It is astonishing these people, how they give themselves the right to say: 'You have no voice, how dare you stick to your views how dare you stick to your dreams and aspirations?'

That’s the most important thing of all. You don’t get bored, you don’t get miserable, you don’t glum, you continue to speak up. What they hope is you’ll just go home, the most important thing is people continue to speak up."

He urged those affected by Brexit to lobby their MPs, and force them to raise the issue in Parliament. 

After Article 50 is triggered, the UK positioning is over, and the EU negotiators will set out their response. As well as the official negotiating team, MEPs and leaders of EU27 countries are likely to give their views - and with elections scheduled in France and Germany, some will be responding to the pressures of domestic politics first. 

For those Remainers who feel politically homeless, there are several groups that have sprung up to campaign against a hard Brexit:

Open Britain is in many ways the successor to the Remain campaign, with a cross-party group of MPs and a focus on retaining access to the single market and holding the government to account. 

Another Europe is Possible was the alternative, left-wing Remain campaign. It continues to organise protests and events.

March for Europe is a cross-Europe Facebook community which also organises events.

The People's Challenge was a crowd-funded campaign which, alongside the more famous Gina Miller, successfully challenged the government in court and forced it to give Parliament a vote on triggering Article 50.

The3million is a pressure group set up to represent EU citizens in the UK.

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.