Auditors ‘serving management instead of shareholders’

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Shareholders should be given a greater role in appointing auditors, according to a Competition Commission inquiry that found senior management at large companies were “inclined to stick with what they know” and only hand contracts to the “big four” audit firms.

The watchdog said smaller audit firms struggled to win deals from FTSE 350 companies, which tend to award work only to Deloitte, Ernst & Young, KPMG and PwC.

Its report also found that 31 per cent of FTSE 100 companies, and 20 per cent of those in the FTSE 250, have used the same auditor for more than 20 years, and lack of competition is likely to lead to “higher prices, lower quality and less innovation for companies and a failure to meet the demands of shareholders”.

The Competition Commission did not call for the break-up of the “big four” but said it was exploring a range of possible remedies to improve competition, including the mandatory rotation of audit firms and giving shareholders more control.

Laura Carstensen, who chaired the watchdog’s investigation group, said: “We have found that there can be benefits to companies and their shareholders from switching auditors but too often senior management at large companies are inclined to stick with what they know, particularly when it is difficult to compare with the alternatives and the incumbent auditors are in a strong position to hold on to the business.”

She added: “It will undoubtedly be challenging to change a long-standing and entrenched system, but our proposals will look to create a situation where tendering and switching become the norm, and where greater transparency and information increase both contestability of the market and the ability of shareholders to judge the service they are getting.”

Richard Sexton, head of reputation and public policy at PwC, accused the Competition Commission of “grossly underestimating” the role that companies’ audit committees play in protecting the interests of their shareholders.

He added: “We are very clear that we report to the shareholders and engage with the audit committee as their representatives.”

Ernst & Young said it strongly disagreed with the Competition Commission’s assertion that the audit market is not serving shareholders, and said the watchdog’s provisional report did not mention the role of chairmen and senior independent directors in safeguarding their interests.

Hywel Ball, the firm’s head of assurance for UK & Ireland, said: “We believe that competition between audit firms is healthy and robust and that the evidence supports this.

“We also are focused first and foremost on audit quality – it is our primary responsibility and directly in the interests of the shareholders of the companies we audit.”

The big four firms audit every member of the FTSE 100 apart from Randgold Resources, the Africa-focused gold miner that switched from PwC to BDO in 2007.

BDO managing partner Simon Michaels said: “We have long been at the forefront of campaigning for change in this market, which has been characterised by a lack of choice for clients and by restricted competition.”

Joanne Segars, chief executive of the National Association of Pension Funds, said: “Auditors are appointed to protect shareholder interests, but are seen as insufficiently independent from executive management and insufficiently sceptical in carrying out audits.

“The audit market needs structural change to increase trust in financial statements and improve auditor accountability to shareholders.”

She added: “We support mandatory re-tendering to improve competition and cut the average audit firm tenure, and also want to see a legal cap that would ensure a maximum run of 15 years with one firm.”