Audit giants attack ‘box-ticking exercise’

Britain’s biggest accounting firms have attacked proposals that will see listed companies put their audit contracts up for tender every five years, arguing that the move could become a “box-ticking exercise” that does little to increase competition.

Picture: PA

However, Deloitte, Ernst & Young, KPMG and PwC expressed relief that the Competition Commission (CC), which has acknowledged that smaller firms struggle to win work away from the “big four”, had ditched radical plans to force clients to switch auditors.

The CC has been examining ways to encourage more firms to hand work to smaller accountants since a report earlier this year found 31 per cent of FTSE 100 members have used the same auditor for more than 20 years.

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Laura Carstensen, who chaired the watchdog’s audit market probe, said: “We do not see a competition problem with audit firms retaining business if they do a good job, but they will have to demonstrate this on a regular basis.”

The big four auditors check the books of every FTSE 100 member except Randgold, the gold miner that ended its ten-year relationship with PwC by switching to BDO in 2007.

James Roberts, senior audit partner at BDO, said the rejection of mandatory switching of audit firms caused “some surprise” but this would have been “superfluous” given the frequency that contracts will now come up for tender.

However, Hywel Ball, head of assurance for UK and Ireland at Ernst & Young (EY), said the firm has not seen any “compelling evidence” to support the move towards tendering every five years, rather than ten years as recently recommended by the Financial Reporting Council. He added: “It is not in the public interest and will likely only serve to increase the financial burden on companies at a time of ongoing economic uncertainty.”

Deloitte UK’s head of public policy, David Barnes, said five-year tendering “is unlikely to advance audit quality or increase market competition, nor will it lead to benefits for shareholders or companies”.

The CC also plans to give shareholders a vote on whether audit committee reports contain enough information. While the regulator said costs will increase by up to £30 million a year for companies and accountants, it claimed the reforms will boost shareholder value.

KPMG’s UK head of audit, Tony Cates, said: “Five-year audit tendering will feel relentless to many companies, audit committees and investors who may see audit quality damaged rather than improved, with the possible result that tendering becoming an empty box-ticking exercise.”

James Chalmers, UK head of assurance at PwC, also argued that the five-year retendering process would have a “major impact” on listed companies.

He said: “We have long argued against mandatory rotation because of its adverse effects on competition. After careful and detailed consideration of the evidence and listening to the concerns of the market, the CC has arrived at the same conclusion.”

The watchdog’s probe, which began in 2011, was prompted by a House of Lords investigation that blamed the “complacency” of the accounting industry for contributing to the financial crisis. Its plans will be put out to public consultation before its final report is published in October.

While putting audit contracts up for tender every five years is aimed at increasing competition, Andre Spicer, professor of organisational behaviour at Cass Business School, said: “Medium-sized firms are unlikely to get a look in.”