The provisional solutions and remedies offered today from the Competition Commission’s investigation into the audit market in the UK are welcomed today by ACCA (The Association of Chartered Certified Accountants).
Since November 2011, the Competition Commission has been looking in-depth at ‘theories of harm’ which relate to concerns about ‘sub-optimal’ audit quality and levels of innovation; higher prices and costs for audit services and the impact of less competition in non-auditing markets.
Sue Almond, technical director at ACCA says: 'The whole point of this investigation has been about the audit market’s structure. While the audit market is static, it must be remembered that auditors act as society’s eyes and ears to report fraud, bribery and money laundering activities; they also assist the assessment and collection of both direct and indirect taxation, so the future of audit services need to be assured and supported.'
Looking at a selection of the Commission’s suggested remedies and solutions, ACCA comments as follows:
- Audit needs to meet the needs of business: It is important that audit meets the demands of the business world, including those of management, investors and shareholders;
- Mandatory tendering: We believe that the auditor appointment should be the primary responsibility of the audit committee, who should make an informed decision based on the particular circumstances. This process requires increased transparency by the audit committee of their policy for audit tendering and the rationale for change, or not, of auditor – known as a ‘comply or explain’ regime. Tendering takes a lot of effort and resources; it would be better to have the Audit Committee explain why they suggest to maintain an auditor without tendering after 10 years, as proposed by the Financial Reporting Council (FRC);
- Mandatory Rotation: ACCA does not believe there is evidence that mandatory rotation increases audit quality. Given the complexity of modern business, it can take two years plus before a new auditor is up to speed, and losing that long-held knowledge could be potentially disruptive for a company. ACCA would prefer to see an emphasis on competitive tendering.
- Strengthened accountability of the External Auditor to the Audit Committee is also important and we would welcome this enhancement, along with suggestions for improved shareholder-auditor engagement. Their involvement will help to drive the audit market which the Commission has described as “static”;
- Prohibition of Big 4 only clauses in loan documentation is an important step in removing artificial barriers to auditor choice by a business;
- Extended auditor reporting will improve transparency between auditors and investors and help articulate the value of the audit.
Sue Almond concludes: 'For ACCA, the issue has always been about the end user of audit services, and we have previously said that future recommendations need to be workable for business while enhancing investor confidence.
'Audit is only one part of this jigsaw and it is not the only way to tackle investor concerns. Progress could be made without creating more rules by enhancing corporate reporting through integrated reporting. This development aims to reflect the interconnected nature of economic and financial performance with environmental, social and governance factors in organisations’ annual reporting.
'We want to see audit services which are well structured, which are trusted and which also bring the most value to business and the end-user. These findings will no doubt be read with considerable interest not only in the UK but across Europe, where the future of audit is also under considerable scrutiny.'