There is, as the joke goes, only one Competition Commission. After today, we may be looking for another one.
The Competition Commission had been looking at the perceived problem of insufficient competition in the audit market. It had already found no evidence of collusion between the Big 4. But this isn't enough in the modern era. Quangoes must be seen to be doing something. So they ploughed on, regardless.
And now we have their final report. Its key recommendations are:
FTSE 350 companies must put their statutory audit engagement out to tender at least every ten years. This differs from guidance introduced by the Financial Reporting Council (FRC) in 2012, which encouraged companies to go to tender on a ‘comply or explain’ basis. No company will be able to delay beyond ten years, and the CC believes that many companies would benefit from going out to tender more frequently at every five years. If companies choose not to go out to tender this frequently, the Audit Committee will be required to report in which financial year it plans to put the audit engagement out to tender and why this is in the best interests of shareholders.
The FRC’s Audit Quality Review (AQR) team should review every audit engagement in the FTSE 350 on average every five years. The Audit Committee should report to shareholders on the findings of any AQR report concluded on the company’s audit engagement during the reporting period.
A prohibition of ‘Big-4-only’ clauses in loan agreements (ie clauses that limit a company’s choice of auditor to a preselected list or category), although it will be possible to specify that any auditor should satisfy objective criteria.
There must be a shareholders’ vote at the AGM on whether Audit Committee Reports in company annual reports are satisfactory.
Measures to strengthen the accountability of the external auditor to the Audit Committee and reduce the influence of management, including a stipulation that only the Audit Committee is permitted to negotiate audit fees and influence the scope of audit work, initiate tender processes, make recommendations for appointment of auditors and authorize the external audit firm to carry out non-audit services.
The FRC should amend its articles of association to include an object to have due regard to competition.
In a word: ouch. And it demonstrates the dangers of wanting to do "something".
It sweeps away the FRC's recently introduced regime of ten year tendering on a comply or explain basis, which already looked to be working well. We now have five year tendering on a comply or explain basis and mandatory tendering every ten years. It's really unclear how this improves competition. Five years is a single audit partner's term. It's just not long enough.
Large firms can afford to tender frequently, whereas smaller firms cannot. Large firms can afford to lose a major client from time to time, whereas smaller firms cannot. Far from loosening the grip of the Big 4 on large company audits, the Competition Commission's plans look to cement it.
Even more bizarre is the AQRT proposal. The Competition Commission is there to review competition, not audit quality. How does increasing audit quality increase competition? It looks suspiciously like a sop to the FRC to say sorry for mucking up their rotation regime. Does this open up an avenue for the Big 4 or the Institutes to seek a judicial review of this finding?
And we're still waiting to see what the European Commission proposes in respect of audit reform.