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October 15, 2013 2:01 pm
When the wheels of progress grind backwards, the sound is always dismal. The probe into audit market services by the UK’s Competition Commission, moreover, began so well. Last February, this recognised that changing auditors could benefit companies and investors. But it also found that cost and conservatism inhibited businesses from doing so – with the result that a third of FTSE 100 members kept the same auditor for 20-plus years. The CC then went on to mull possible reforms. But its final conclusions, out on Tuesday, fall well short of what is needed.
That is not to say that they are useless. Some sensible adjustments are proposed, such as barring clauses that limit choice of auditor from loan agreements, and beefing up audit committees. But the core reform – mandatory re-tendering of audit work at FTSE 350 companies – has been watered down, so that this is only required every decade instead of every five years, as first proposed. Judging from the language, the CC is not entirely happy with the longer timetable. But it has been pressured: auditors, for example, estimate the costs of a blue-chip tender at up to €1m, concluding that a five-year rule might eat up 10 per cent of annual audit fees. If re-tendering occurs too frequently, it is argued, some firms will not participate. So audit choice, already confined to a handful of firms, could become even tighter.
A good question might be why these costs are so high. A better one could be why a mandatory rotation rule – after, say, 15 years – got lost along the CC’s way. Shorn of this, re-tendering risks becoming window-dressing. Well-meaning groups may try to shake things up more often, but run into the complexities of having Big Four accounting firms supply audit and non-audit services. The laggards will face only limited pressure; mid-tier audit firms, few openings. With pan-EU audit reforms stalled, investors deserved better.
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