Tendering of external audit: the competition commission’s recommendations

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Procurement has made great progress in recent years in influencing both Legal and Management Consultancy spend. However, procurement’s efforts to help re-negotiate or tendering the statutory auditing requirements have often fallen on stony ground.

Lack of competition in the audit industry

The Competition Commission (CC) has recently been seeking to address the Office of
Fair Trading’s concerns relating to the lack of competition in the audit industry. The following statistics provide some useful context to the concerns:

  • 90% of the UK’s largest stock market-listed companies are currently audited by one
    of the “Big Four” firms (KPMG, Deloitte, Ernst and Young, PwC)
  • 31% of the FTSE 100 have had the same auditor for more than 20 years
  • 67% of firms had had the same auditor for more than 10 years

As well as addressing the above concerns, the CC was also keen to address the perception
that auditors sometimes tended to satisfy the needs of its clients’ management teams rather than the clients’ stakeholders.

The Competition Commission’s interim recommendations

To improve matters, the CC issued an interim recommendation proposing:

  • FTSE 350 firms must allow accountancy firms to bid for their audit work at least
    every 5 years.
  • Provisions in loan agreements which restrict a company’s choice of auditor to one of the big 4 firms are to be prohibited.
  • The Audit Quality Review team (AQR) of the Financial Reporting Council (FRC) should review every audit engagement in the FTSE 350 on average every 5 years. The AQR should review and report on the larger Mid-Tier firms on an annual basis.

Good news for procurement

The Commission’s proposed recommendations can only be seen as good news for procurement. The fact that the report is only provisional, and once finalised will include a 5 year grace period, should not stop procurement managers starting to engage with CFO’s and Audit Committee members regarding the way forward.

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