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UK’s FRC rejects calls for compulsory audit rotation

Despite pressure to encourage greater competition in the UK’s accounting market, regulator waters down its proposed rule changes

Although it had hinted at imposing mandatory audit rotation when it began its review of the rules governing the UK’s accountancy market, the Financial Reporting Council (FRC) has turned its back on the proposals that many observers felt would lead to a more transparent market.

The UK’s Competition Commission announced proposals to force FTSE 350 companies to put out to tender every five years audit work; a much harder stance than the FRC’s proposed ten year tendering requirements.

However, the FRC is said to be concerned about the impact such regular tendering would have on company operations and the costs linked to tendering for new auditors. While the Competition Commission was keen to force a more level playing field on the market, it has stopped at making compulsory auditor changes necessary for leading companies.

This represents a considerable scaling back of the enforced rotation that many had been calling for to ensure transparency within the UK’s biggest companies, as well as the leading audit firms.

Dominated by the Big Four accounting firms, the UK’s audit market has come under scrutiny after a number of high profile cases showed too cosy a relationship between both the companies being audited and the firm scrutinising them.

Deloitte, PricewaterhouseCoopers, Ernst & Young and KPMG have a hold on the UK’s accounting market, and smaller firms – including BDO and Grant Thornton – have called for changes to rules that would mean they have a fairer chance of getting business.

European discussions
A consequence of the UK’s caution over imposing such strict rules is that they are forced to adhere to those drawn up in Brussels. The EU has been keen to make the accountancy industry more competitive and transparent, and one British MEP has proposed mandatory rotation every 14 years.

Sajjad Karim MEP drafted the reforms in April, which he said would ensure transparency, but not too frequently as to restrict a company’s competitiveness. In light of the FRC’s proposals, Karim told Corporate Governance Report: “The findings from the UK Competition Commission confirm that a package of measures are required to resolve concerns about standards in markets for audit services. I have long called for any concerns for standards to be addressed by relevant national competition authorities, and am satisfied by those provisional remedies identified in the UK.”

“The UK commission findings chime with my proposals adopted at the European level, which recognise that any reforms need to be carefully weighed and should not have an adverse effect on the market. I have above all emphasised the importance of the audit committee when devising the European reforms, something which the Competition Commission has also taken on board.”

Karim is keen to point out that making companies rotate their auditors too frequently would hinder their ability to be competitive: “Forcing companies to rotate after a short period of time is detrimental to audited companies and auditors alike; it flies in the face of our goal of restoring trust in the financial system and ensuring the highest quality audit services are available for shareholders and investors.”

He added: “Auditors require a sufficient length of time to ensure the audit process is carried out judiciously, but we must also recognise that some tenures may be perceived as too long. This fine line is something we need to get right. We need auditors and companies to be able to focus on the audit, and shareholders and investors to have confidence in this process.”

European-wide reforms for auditing are expected to be voted on towards the end of this year by the European Parliament, and Karim believes that a deal will be struck: “Our work at European level continues with the hope that a conclusion can be reached by the end of the year. I am confident that European lawmakers can resolve their present differing opinions, and the reforms agreed will be of great benefit to financial reporting and corporate governance across Europe.”

 

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